Emmanuel Bergasse, Wojciech Paczynski, Marek Dabrowski, Luc … · 2016. 5. 3. · Emmanuel Bergasse, Wojciech Paczynski, Marek Dabrowski, Luc Dewulf CASE Network Reports No. 112

Emmanuel Bergasse, Wojciech Paczynski, Marek Dabrowski, Luc Dewulf

CASE Network Reports No. 112 2

The views and opinions expressed here reflect the authors’ point of view and not

necessarily those of CASE Network.

This paper has been prepared within the agenda of FP7 funded project (Grant

Agreement No. 244578) on “Prospective Analysis for the Mediterranean Region

(MEDPRO)”

Keywords: Southern Mediterranean Countries (SEMCs); Socio-Economic

Development, Energy Demand, Energy Efficiency, Energy Prices, Energy Sub-

sidies, Resource Curse, Dutch Disease, Oil Syndrome, Energy Policy, Socio-

Economic Development Strategy, Targeted Subsidies, Integrated Energy

Strategy, Energy Efficiency Action Plans, Renewable Energy Action Plans, Cli-

mate Policy, Regional Mediterranean Energy Cooperation, Arab Spring

JEL codes: A10

© CASE – Center for Social and Economic Research, Warsaw, 2013

Graphic Design: Agnieszka Natalia Bury

EAN 9788371785818

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THE RELATIONSHIP BETWEEN ENERGY AND ECONOMIC AND SOCIAL…


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Contents

Executive Summary ............................................................................................. 10

Introduction to the Energy and Socio-Economic Contexts .............................. 12

1. Global SEMC Features ................................................................................... 13 1.1. Macroeconomics ....................................................................................... 13 1.2. Socio-Economic Development ................................................................. 13 1.3. Energy Features and Policies .................................................................... 14

1.3.1. Energy Features .......................................................................... 14 1.3.2. Energy Policies ............................................................................ 16

2. The Role of Access to Energy Andenergy Sector in Economic and Social

Development ......................................................................................................... 18 2.1. Access to Energy and Role in Socio-Economic Development ................. 18

2.1.1. Energy as Crucial Socio-Economic Development input ............. 18 2.1.2. Energy as a Burden ..................................................................... 27

2.2. Energy Sector and Its Impact on Socio-Economic Development ............. 45 2.2.1. Energy Sector’s Socio-Economic Contributions ......................... 45 2.2.2. Energy Sector’s Subsidies ........................................................... 47 2.2.3. Energy Exports and Revenues: a Blessing or a Curse? .............. 49

3. Scenario and Policy Approach for Integrated Socio-Economic Development

and Energy/Climate Policies in SEMCs ............................................................ 55 3.1. Socio-Economic Reforms to Build the Fundamentals .............................. 55 3.2. Integrated Energy/Climate Policy ............................................................ 60 3.3. Regional Energy Cooperation: Initiatives and Challenges ....................... 62

Bibliography ......................................................................................................... 68

Annex 1. SEMC Household Electricity Prices (2008) ....................................... 74

Annex 2. Energy Subsidies in Southern Mediterranean Countries (SEMCs) 75



List of Figures and Tables

Figure 1. Energy consumption per capita and GDP per capita (2009) .................. 21

Figure 2. Relation between GDP andelectricity consumption for MED 11 and EU

countries (2009) ..................................................................................................... 24

Figure 3. Social, economic and environmental impacts of energy subsidies ........ 33

Figure 4. Distribution of various subsidies by category of population revenues in

Egypt (2004) ......................................................................................................... 44

Figure A1. Average electricity tariffs for households in 2008 .............................. 74

Figure A2. Average monthly electricity household bill (in kWh/month)

(MEDENER/ADEME, 2012) ................................................................................ 74

Table 1. SEMC macro-economic and energy data and indicators(2009) .............. 23

Table 2. Main types of energy subsidies ............................................................... 31

Table 3. Energy subsidies in SEMCs(2010 or most recent available data) ........... 35

Table 4. Domestic fuel price subsidy mechanisms in net energy importing

countries .............................................................................................................. 37

Table A1. Food and fuel subsidies in SEMCs as a% of current government

expenditure ............................................................................................................ 75

Table A2. IEA Estimates of Energy Subsidies in selected energy exporting Arab

Countries, 2010 ..................................................................................................... 76



List of Abbreviations

BBL barrel (of crude oil)

CSP concentrating solar power

EE&RE energy efficiency and renewable energy

EDI Energy Development Index

EBRD European Bank for Reconstruction and Development

EIB European Investment Bank

FEMIP Facility for Euro-Mediterranean Investment and Partnership

GDP gross domestic product

GHG greenhouse gas

LPG liquefied petroleum gas

IEA International Energy Agency (OECD)

IFIs International Financial Institutions

IT information technology

MSP Mediterranean Solar Plan

NIF Neighbourhood Investment Facility

NGO Non-governmental organization

MENA Middle East and North Africa

MPC Mediterranean Partner Countries

OECD Organisation for Economic Co-operation and Development

OPT Occupied Palestinian Territory

PPP Purchasing power parity

UfM Union for the Mediterranean

UNDP United Nations Development Programme

RCREEE Regional Centre for Renewable Energy and Energy Efficiency

SEMCs southern and eastern Mediterranean countries1

SWH Solar water heater

toe ton of oil equivalent

VAT Value-added tax

1 Algeria, Morocco,Tunisia, Libya, Egypt, Israel, Jordan, Lebanon, OPT, Syria, Turkey.

http://www.eib.org/?lang=fr

http://www.iea.org/

http://www.google.es/url?sa=t&rct=j&q=oecd&source=web&cd=9&ved=0CHkQFjAI&url=http%3A%2F%2Fen.wikipedia.org%2Fwiki%2FOrganisation_for_Economic_Co-operation_and_Development&ei=qTVrT_-0EYKZOoO-qIYG&usg=AFQjCNGl0oIbVmqHvbB7DVGtqsl26ywRpQ

http://www.frontlinedefenders.org/Palestine



The authors

Emmanuel Bergasse, Energy Economist and Energy Policy Expert, has gained

an extensive experience on sustainable energy policies and market reforms in tran-

sition economies of Central and Eastern Europe and the Southern Mediterranean.

As independent consultant, he has designed, managed and evaluated several large

international projects. For instance, for the International Energy Agency (IEA) in

Paris, he managed and co-prepared several energy policy surveys, including "West-

ern Balkans: The Path to Reform and Reconstruction" (IEA/UNDP, 2008). He is a

CASE Fellow since 2010.

Wojciech Paczyński is a CASE Fellow. His research interests include applied

macroeconomics, international economics, international relations, game theory and

economics of education. He has managed several research, analytical and advisory

projects in Europe and Central Asia and other regions and has published on Euro-

pean integration, monetary unions, monetary policy, currency crises and interna-

tional energy cooperation. He is a member of the DG ECFIN Euro Team. He worked

for the OECD Economics Department, University of Dortmund, and the Polish Min-

istry of Economy and served as a consultant for the World Bank and OSCE.

Marek Dabrowski, CASE Fellow, Chairman of the Supervisory Council and

President of CASE until 2011, Member of the Scientific Council of the E.T. Gaidar

Institute for Economic Policy in Moscow; Former First Deputy Minister of Finance

(1989-1990), Member of Parliament (1991-1993) and Member of the Monetary Pol-

icy Council of the National Bank of Poland (1998-2004); Since the end of the 1980s

he has been involved in policy advising and policy research in Azerbaijan, Belarus,

Bosnia and Herzegovina, Bulgaria, Egypt, Georgia, Iraq, Kazakhstan, Kyrgyzstan,

Macedonia, Moldova, Mongolia, Poland, Romania, Russia, Serbia, Syria, Turkmen-

istan, Ukraine, Uzbekistan and Yemen, as well as in a number of international re-

search projects related to monetary and fiscal policies, currency crises, international

financial architecture, EU and EMU enlargement, perspectives of European integra-

tion, European Neighborhood Policy and political economy of transition; World

Bank and UNDP Consultant; Author of several academic and policy papers, and

editor of several book publications.



Luc De Wulf, CASE Fellow and former staff member of the International Mo-

netary Fund (Fiscal Affairs and Asian Departments -1972-88) and the World Bank

(African and Middle East Departments -1988-2000). Since 2000, he has worked as

an independent consultant for the World Bank, the IMF, DFID, SADC, and SACU.

His main responsibility in recent years has been to lead teams of experts that analy-

sed the progress of integration between the European Union and Mediterranean

countries in the context of several large EU funded projects. Aside from regional

integration, his other areas of expertise cover fiscal policy, trade facilitation and

customs reform. In addition to a number of academic papers, he co-editored

“Customs Modernization Initiatives” (World Bank, 2004) and “Customs Moder-

nization Manual” (World Bank, 2005). Since 2000 he has mainly worked in African

and Middle Eastern countries.



Abstract

This report aims to identify, explain and detail the links and interactions in south-

ern and eastern Mediterranean countries (SEMCs) between energy supply and de-

mand and socio-economic development, as well as the potential role of energy sup-

ply and demand policies on both. Another related aim is to identify and analyse, in

a quantitative and qualitative way, the changing role of energy (both demand and

supply) in southern Mediterranean economies, focusing on its positive and negative

impact on socio-economic development.

This report investigates in particular:

The most important channels through which resource wealth can contribute

to or hamper economic and social development in the analysed region;

Mechanisms and channels of relations between energy supply and demand

policies and economic and social development.

The burdens of energy subsidies and ‘oil syndrome’ are of particular relevance

for the region. An integrated socio-economic development and energy policy sce-

nario approach showing the potential benefits and synergies within countries and

the region is developed in the final part of the report.



Executive Summary

Despite relatively strong economic growth in recent years, the southern and east-

ern Mediterranean countries (SEMCs) face a range of pressing socio-economic

challenges, such as poverty, large structural unemployment and rapid demographic

growth. Energy is an essential commodity that enables socio-economic develop-

ment. However, the current energy situation in the region is characterised by a rapid

increase in energy demand, low energy efficiency and low domestic energy prices

due to extensive universal consumption subsidy schemes. In short, the current en-

ergy policies do not appear to be sustainable and pose several risks to the prospects

of socio-economic development of the region.

Patterns of energy supply and consumption in SEMCs strongly affect main

macro-economic parameters, including fiscal balances and poverty trends. Volatil-

ity of global energy commodity prices and their relatively high levels in recent years

constitute a burden on the finances of many net importing countries, both at the

government level (via costs of running universal consumption subsidies) and the

utility level. This also affects energy exporting countries. Furthermore, urbanisation,

rapid population growth and economic growth all add to rising energy demand and

put pressure on existing infrastructure, necessitating large new investments.

Excessive energy bills lead to energy poverty and harm living standards and so-

cio-economic development. As for other commodities (e.g. food, water), SEMCs’

governments use universal energy consumption subsidies to mitigate energy pov-

erty. However, such price subsidy schemes appear to be quite inefficient at address-

ing poverty because on average only 20% of all energy subsidies (and 8% of fossil

fuel subsidies) go to the poor, while most benefits profit the wealthy groups who

consume more energy. Also, the subsidy schemes place heavy burdens on SEMCs

state budgets, especially since the 2007-08 oil price surge that led to energy subsi-

dies further increasing their share in total government expenditure. This growing

pressure on state budgets appears to be unsustainable, in particular in Egypt, Leba-

non and Syria (where subsidies account for more than 15% of total budgetary ex-

penses). Furthermore, by distorting price signals, universal price subsidies act as a

strong disincentive to a more rational and efficient use of energy and investment in

the energy sector, including in renewable energy.

The energy sectors in SEMCs, especially in those exporting oil and gas, make

up a large share of the economic activity and public finances. Nonetheless, certain

market structure features and modes of energy sector operation lead to significant

negative externalities, and can burden the whole economy. Large hydrocarbon rev-

enues in two SEMCs (Algeria, Libya) account for a dominant share in their exports



and state budget revenues, determining their macroeconomic performance. How-

ever, without proper strategies and management, they generate structural domestic

imbalances that paradoxically harm socio-economic development and lead to sub-

development. Overall, rent-seeking strategies (with low labour intensity and added

value) appear to be detrimental to economic growth and lock economies and public

budgets into dependency on a single sector and one-commodity market, which, fur-

thermore, is volatile. Without appropriate action this so-called ‘paradox of plenty’

(or resource curse, Dutch disease or ‘oil syndrome’), can have ravaging and long-

term socio-economic consequences.

Energy producers also receive public subsidies, generally for large capital-inten-

sive projects but such subsidies can also harm economic efficiency as the economic

viability of those investment plans is rarely properly assessed.

There are strong links and interactions between energy and other sectors in socio-

economic development. Public policies addressing current challenges thus need to

take a global, cross-sectoral view. They need to be well structured and systemic to

overcome deep and accumulating socio-economic difficulties and negative vicious

interactions between socio-economic processes and energy. In particular, this ap-

plies to the costly universal energy subsidy schemes and the penalising oil syn-

drome. Such integrated socio-economic development and energy/climate poli-

cies need to rely on three main pillars:

1. Long-term socio-economic development strategy based on a robust insti-

tutional set-up, a solid statistical system, enhanced public governance, in-

cluding for oil revenue management, and a poverty reduction strategy with

targeted support instead of universal consumption price subsidies.

2. Integrated energy/climate policy articulated in a national energy strat-

egy: security and access, regulatory reforms towards full cost-reflective en-

ergy prices, energy sector restructuring and energy efficiency and renew-

able energy (EE and RE) action plans in synergy with climate change pol-

icies (carbon financing).

3. Regional energy cooperation (intra-Med and EU-MED) to focus on infra-

structure (e.g. power and gas interconnections) and markets (e.g. EU/SEMC

renewable electricity market), fostered by the Mediterranean Solar Plan

(MSP) and integrated regional financing.



Introduction to the Energy and Socio-Economic Contexts

The complexity and interdependences between socio-economic sectors, coun-

tries and regions necessitate a multi-sectoral and integrated analysis in order to ac-

curately assess their main features. An in-depth and multi-dimensional approach is

also necessary to design, enforce, monitor and evaluate public policies, and enhance

stakeholders’ (investors, consumers, civil society) information and involvement in

the development cycle of those public policies. Furthermore, they need to take into

account the perspective of broad-based political reforms related to the Arab Spring.

Energy plays a crucial role as a global commodity and as a cornerstone of socio-

economic development. In the 11 southern and eastern Mediterranean countries

(SEMCs)2, this role is even greater with the combined persistence of energy poverty

and sizeable exporting energy sectors, with their potential curse and burden effects.

Given the quantitative and qualitative importance of both energy consumption and

energy sectors in the socio-economic development of the economies analysed, an

in-depth understanding of their positive and negative impact is of the utmost im-

portance for policy design. Thus, this paper focuses on:

The interactions between energy consumption and supply and socio-eco-

nomic development;

The mechanisms and channels of relations between energy supply and de-

mand policies and economic and social development;

A scenario approach which integrates the national and regional energy poli-

cies in synergy with the socio-economic development of the region.

Methodological note: the chosen approach mostly relies on analytical and pol-

icy assessment based on various sources (MEDPRO technical reports, other reports,

studies, publications, academic articles) and case studies (e.g. SEMC energy subsi-

dies). Each listed topic’s rationale (state of the art) is first reviewed and then de-

scribed and specifically analysed for the SEMCs.

Most of energy data are provided by the International Energy Agency

(IEA/OECD).

2 Algeria, Egypt, Israel, Jordan, Lebanon, Libya, Morocco, Occupied Palestinian Territory,

Syria, Tunisia and Turkey,

http://www.iea.org/

http://www.iea.org/



1. Global SEMC Features

1.1. Macroeconomics3

The population in SEMCs amounted to 281 million in 2009–(Table 1provides

details).Average GDP by capita reached USD 7,400 (in PPP) with important dispar-

ities between the countries with high (Israel: USD 28,700), intermediate income

(Turkey: USD 11,600 -PPP and Tunisia: USD 8,500) and low-income countries

(Egypt: USD 4,200 and Syria: USD 3,500). The majority of the SEMCs experienced

solid economic growth over the last decade, allowing a certain improvement in liv-

ing standards (improvement in health and primary education services, reduction in

illiteracy). The impact of the global crisis after 2008 was less severe than in other

regions of the world that are more dependent on international trade. Nevertheless,

the impacts of the crisis and the dramatic increase in food and energy prices accen-

tuated financial, budgetary and social imbalances, in particular high unemployment

among the urban population and youth including graduates. Even if the incidence

of absolute poverty is in general relatively low, vulnerability is high because large

and increasing shares of the population live on incomes close to the poverty line

(population under the USD 2 (PPP) a day threshold: Algeria: 23.6%, Egypt: 18.5%,

Jordan: 3.5%, Morocco: 14%, Tunisia: 13%, Turkey: 2% (World Bank, 2010; Arab

Statistics, 2010).

1.2. Socio-Economic Development

Most SEMCs, while experiencing continuous socio-economic development, also

face serious and structural imbalances, in particular poverty and unemployment.

Progress in addressing structural poverty in these countries has stagnated since

the early 2000s. Taking a poverty line of USD 3 per day rather than USD 2 per day

would double poverty in the region to 92 million (Pearce and Mohamadieh, 2009).

3 Based on MEDPRO D5.1, Fiscal and macroeconomic database, Technical Report No. 10

“Determinants of Growth and Inflation in Southern Mediterranean Countries”, (Coutinho,

2012), and a selection of international sources (IMF, WB, UNDP).



The Millennium Development Goals report outlines that since 1990poverty has de-

creased in all regions except for MENA (including Egypt, Lebanon, Syria, Jordan

and Palestine) (United Nations, 2010).Actually, poverty has increased in the region

with a high share of population close to the poverty threshold. Thus, even small

income falls and/or small increases of basic goods prices can push them into pov-

erty.

Along with poverty and unequal revenue distribution, SEMC suffer from struc-

tural unemployment (officially ranging from 9 to 13% but alternative estimations

indicate 20 to 30%), especially affecting women (14%) and young people (22%),

even with sustained economic growth. The main explanations include a rapid de-

mographic increase associated with a young population, a relatively inefficient ed-

ucation system and the domination of economic sectors with limited job creation

capacities and high volatility (e.g. retail trade, real estate and the financial sector).

Since 2008, the global economic and financial crisis has increased unemployment,

which is also combined with high informal employment (Pearce and Mohamadieh,

2009).

1.3. Energy Features and Policies

1.3.1. Energy Features

The energy situation of most SEMC is characterised by a rapid increase of energy

demand (5-8% annually)4, low efficiency in both supply and demand, artificially

low domestic energy prices as the result of generalised and costly consumption sub-

sidies combined with high non-payment rates. As a result of low-cost recovery for

electricity, current customer electricity prices in most SEMC are well below the

generating costs of renewable energy technologies (such as wind) and even below

generation costs relying on fossil fuels5 (see graph in Annex 1). Oil product prices

are also distorted by high universal price consumption subsidies that are a heavy

burden on public finances. According to the World Bank, “The region is lagging

behind in implementing reforms in the electricity sector and lacks private sector

4 With a 7% annual increase, capacity has to double every 10 years. 5 In particular due to low prices (Egypt: 2 c€/kWh, ALG: 3.5c€/kWh, Morocco: 6.5c€/kWh,

Tunisia: 9c€/kWh) and distribution losses (mostly-non-payment) (Algeria: 20-25%, Egypt:

20-25%, Lebanon: 40%); average inland wind generation cost is at around 6€c/kWh (without

transport and distribution cost).



investment” (World Bank, 2010a). Thus, energy companies, which are mostly pub-

lic monopolies, suffer from chronic deficit (the ‘scissor effect’ of insufficient reve-

nues to cover increased investment and maintenance costs).

Infrastructure is generally outdated and saturated by rapid population and eco-

nomic growth and urbanisation, leading to deteriorating security and quality of sup-

ply, especially for electricity (chronic blackouts in Algeria and Egypt at peak hours).

Actually, under current trends (the ‘Business as usual’ scenario), total energy de-

mand in SEMCs is expected to rise by as much as 70% by 2020, of which fossil

fuels will cover 91%, leaving a tiny share for renewable energy (4% or the same

level as in 2009%).6 Given the large projected increase in demand, the total MENA

region energy investment needs are estimated at over USD30 billion a year up to

2040, or about 3% of the region’s total projected GDP. Such high projected energy

investment needs is around three times above global average (World Bank, 2010a),

and represents increased risks and negative socio-economic impacts.

Furthermore, the volatility of international oil prices aggravates economic, fi-

nancial and social imbalances.7 This persistent vicious circle appears unsustainable

in the short to medium term. Finally, those imbalances, especially low energy tariffs

and high consumption subsidies, are also major barriers to both energy efficiency

(EE) and renewable energy (RE) deployment.

In energy supply terms, there are two distinct groups of countries among the in

SEMCs: the net exporters of hydrocarbons (Algeria, Egypt, Libya and Syria) sup-

plying 22% of the oil imports and 35% of the gas imports of the whole Mediterra-

nean basin.8 The other countries are importers with a very high dependency and

costly commercial bills (in Jordan energy imports accounted for around 13% of its

GDP in 2009, in Morocco the same share was 3.5%). On the whole, the SEMC

region is a net exporter selling approximately a third (106 Mtoe) of their total energy

consumption abroad, or more than the total supply of Turkey or Poland.

SEMC energy consumption at 1.1 ton of oil equivalent (toe) per capita and 1,770

kWh of electricity per capita remains far below levels seen in northern Mediterra-

nean countries. Nonetheless, SEMC energy consumption has been rising fast, exac-

erbated by high energy intensity, underlining an important energy saving potential.

However, it remains largely neglected in the region (with the exception of Tunisia,

which has developed a proactive energy efficiency and renewable energy (EE&RE)

6 For total energy primary supply – TPES (electricity consumption accounts for 15% of

TPES in 2009 and 18% in 2020-OME, 2008; MEDPRO/WP 4b. 7 In Morocco, the deficit of the “Caisse de compensation” reached around 4% of GDP in

2010 (2% in 2007); in Egypt: subsidies for energy account for 9.3% of GDP; in Lebanon:

17% of the 2007 public budget was allocated to general electricity price subsidies. 8 Northern and southern rims.



policy since 1985).The transport sector has recorded the biggest increase of energy

consumption over the last 30 years in the SEMC and accounts for approximately

one-third of the total energy intake. Also, the industrial and residential sectors

strongly increased their consumption, to account for 36% and 27% respectively of

the total intake (2005).

Fossil fuels (oil, gas, coal) account for 80% of the energy supply of the SEMCs.

The share of renewable energy, apart from hydropower and biomass, remains lim-

ited at less than 3% of primary energy supply. Thus, both energy and carbon inten-

sities are relatively high (increasing environmental problems such as water and air

pollution). Energy import bills are large in absolute and relative terms, underlining

the high energy dependency of importing countries.

While most SEMCs have reached close to 100% of electrification coverage9,

groups of the population still lack effective access to electricity (e.g. 0.5 million in

Egypt, 0.9 m in Morocco and 1.5 m Syria: 93%), especially in rural areas, and/or

still rely on traditional biomass.

1.3.2. Energy Policies

Most SEMCs are at an early stage of energy policy development; currently it is

fragmented as well as mostly:

Supply-oriented (while demand and customer needs are largely neglected);

Energy and export focused (while largely disconnected from other transversal

public policies such as transport, urbanisation, regional development and en-

vironment);

Insufficiently based on verifiable evidence(as there is a lack of reliable and

accessible information and data in the context of powerful stakeholders: pub-

lic energy monopolies, equipment manufacturers, banks);

Short-term focused; neglecting long-term vision and synergies with other sec-

tors and externalities;

Relying on poor or inadequate policy cycles, in particular insufficient stake-

holder and public consultation, inadequate design, low enforcement or weak

monitoring and evaluation (feedback).

The above features result in weak energy administrations that are particularly

problematic given the strength of dominant energy monopolies. These weaknesses

9 Morocco: 97%, Syria: 93%; 2008.



reduce the capacity to design, enforce and evaluate effective energy policies. Nev-

ertheless, it should be noted that countries such as Jordan and Tunisia, and more

recently Morocco, have placed more emphasis on both energy policies and the in-

stitutional setting. Hydrocarbon exporting countries, such as Algeria and Egypt have

established relatively strong administrations and companies.



2. The Role of Access to Energy And Energy Sector in Economic and Social Development

2.1. Access to Energy and Role in Socio-Economic Development

2.1.1. Energy as Crucial Socio-Economic Development input

Energy is an essential commodity for most human activities, directly (as fuel) or

indirectly (to provide power, light, mobility).

In traditional societies, populations rely on their own physical strength for la-

bour, then on the power of domesticated animals, such as horses and oxen, then on

water and wind, steam engines, hydrocarbons (fuel motors for land, sea and air ve-

hicles) and finally -electricity. Energy combined with technology multiplies human

force (e.g. motor fuel for cars, electricity for household appliances), thereby playing

a crucial role in pre- and post-industrial and then IT societies. For other essential

needs such as space heating and cooking, the transition has been from local biomass

(e.g. firewood, agriculture waste) to industrialised fuels (e.g. LPG, natural gas) and

also electricity (Stern, 2011).

Poor access to reliable and affordable modern energy services therefore acts as

a barrier to economic and social development.

This socio-economic contribution will be assessed in more detail at economic

and social/human development as well as tax levels in the three following sections.

2.1.1.1 Economic Development

The mechanisms at play – an overview

Since the industrial revolution, energy has been a crucial ingredient of economic

development. It is a direct (e.g. used in the industrial process and transport) and

indirect input (the energy content of used goods, equipment and services) for most

productive processes in primary sectors (mining, agriculture), industry and services,

including transport and IT.



Industry absorbs 30% of the world energy consumption and uses it in all its trans-

formation processes (e.g. heating, drying, and melting) and as a mechanical and

driving force. Road, rail, sea and air transport mostly depends on oil products and

increasingly on electricity, accounting for 27% of total consumption. These first two

major sectors, industry and transport, which absorb almost 60% of global energy

consumption, mostly rely on commercial energies. Service activities (e.g. education,

trade, offices, tourism etc.) like the residential sector, abundantly use energy to meet

their multiple needs (lighting, cooking, hot water, heating, air-conditioning, IT, tel-

ecommunication, refrigeration and other electric household appliances). With agri-

culture, which mostly uses mechanical force and energy-intensive inputs such as

fertilizers, these sectors account for 33% of the total consumption of energy

(Laponche, 2005).

The expanded provision and use of energy services is strongly associated with

sustainable economic development and growth. The Johannesburg Summit on Sus-

tainable Development (2002) explicitly recognised the privileged place of energy in

the construction of a durable human development.

The combination of crossed energy and sectoral interdependences has reinforced

the energy dependence of most economic sectors so that a disruption to electricity

or oil supply would bring about a rapid stand still. Beyond the security of energy

supply, its accessibility and affordability are also important factors to consider. The

process of converting economic inputs (capital, labour, goods and various forms of

energy such as oil, coal etc.) into economic outputs such as manufactured goods and

services can be expressed using an equation called the production function.

In order to fulfil the objective of economic growth, which is the basis of eco-

nomic and social development, it is necessary to have access, at affordable prices,

to abundant and diverse energy forms, primarily commercial, which feed into the

economic grid. A common policy objective is to make the required energy available

to economic agents at best cost. As economies develop, energy consumption ini-

tially grows more or less in parallel to economic growth. An adequate, secure and

affordable energy supply is thus needed to meet the needs of the business and do-

mestic users, including the transport of people and goods.

However, it leaves open the question of how important energy is as a direct

causal factor in economic development. In order to find out how influential energy

input is on its effect output on an aggregate basis, the ratio between energy con-

sumption and output (its associated value and thus GDP, one of the indicators of

economic growth or in physical units) is the most frequently used indicator. This

energy intensity at a product/service, production unit, company, region and country



level indicates the share of energy in output. While the primary and industrial sec-

tors have a generally high energy intensity, service sectors are less intensive but

qualitatively very dependent on energy, especially IT and transport.

Advanced industrialised economies use less energy per unit of economic output

(EU27: 0.14 toe/thousand USD PPP but more per capita (EU27: 3.3 toe) than tradi-

tional and poorer societies (Africa: 0.26 toe/thousand USD PPP and 0.67 toe/capita),

especially those in pre-industrial stage (0.09 and 0.11 toe/thousand USD PPP and

0.18 and 0.35 toe/capita respectively for Bangladesh and Cambodia). The use of

energy per unit of economic output significantly declines over time and in more

advanced stages of industrialisation and post-industrialisation reflecting the adop-

tion of more efficient technologies for production and use, combined with structural

changes of the economy (trend to switch from primary to services activities) (Stern,

2003). Also, the heavy reliance on GDP data to calculate energy intensity can be

misleading in comparing regions and countries, as GDP does not integrate informal

and black economies. Also, the high level of GDP in industrialised economies and

its decoupling from energy use has structurally reduced energy intensity while their

energy consumption ratio per capita is high and overall energy dependency is pro-

nounced.

Data analysis (Stern, 2003 and 2011) highlights a strong correlation between per

capita energy consumption and development level (measured by GDP per capita)

(see Figure 1). Furthermore, time series analyses confirm this correlation with the

level of economic development.

Beyond the correlation between energy consumption and GDP, the IEA has de-

veloped the Energy Development Index (EDI) that mirrors the UNDP’s Human De-

velopment Index and is composed of four indicators:

Per capita commercial energy consumption: an indicator of the overall access

to modern energy and somehow of the economic development of a country;

Share of population with access to electricity;

Per capita electricity consumption in the residential sector: an indicator of

household access to electricity services and an indication of consumers’ abil-

ity to pay for them (but not sufficient when bill payment problems exist);

Share of modern fuels in total residential sector energy use, which serves as

an indicator of the level of access to clean cooking facilities.



Figure 1. Energy consumption per capita and GDP per capita (2009)

Sources: IEA, 2010, IMF, 2010 (sample of 52 OECD, emerging and developing countries).

The increased availability of energy services might be a key to stimulate eco-

nomic development along the different stages of the development process. The evi-

dence underscores the importance of energy in economic development (Quoilin,

2005). Nevertheless, what is the causality and correlation between the two varia-

bles? Can one affirm that access to energy favours development? Or on the contrary

that development supports energy consumption? Or perhaps a third variable exists

inducing the two effects? The answer is probably at the intersection of these three

proposals. One can in any case affirm that the development is concomitant with

energy consumption. Also, the interactions among energy, other sectors, and eco-

nomic activity significantly evolve along the various development stages. Clearly,

more analytical work appears to be necessary to better understand the relationships

between them and the role of energy in economic growth and development.

0

2

4

6

8

10

12

14

16

18

0 20 40 60 80 100 120

Energy consumption

(toe/cap.)

GDP per capita (USD, PPP)



Global access to reliable energy services that could include renewable energy

sources at tariffs (of connection and consumption) compatible with economic ac-

tors’ incomes has a strong potential for positive socio-economic development in

particular through the:

Creation of new activities and employment;

Generation of incomes for landowners;

Reduction of rural migration;

Use of local resources instead of imports;

Knowledge acquired by the technicians and managers of installations.

On the contrary, when energy services are hardly available or insecure (no con-

nections/access, shortages/cuts, energy poverty), this does create bottlenecks, struc-

tural barriers, and extra cost at micro and macro levels.

Situation in the southern and eastern Mediterranean countries

Table 1 presents key social and energy indicators of SEMCs.

Compared to low-income developing countries (mostly those of Sub-Saharan

Africa), the SEMCs economic and energy specificities include:

Smaller agriculture and rural share in the labour force and GDP;

Larger and more diverse industrial sectors;

Transport, water and energy infrastructures cover large to medium economic

centres;

Smaller grey and black sectors;

Almost comprehensive access to commercial energy: electrification at almost

100%, fossil fuels such as LPG largely replaced biomass;

The diversity of energy use is already well advanced (transport, industrial

process, space cooling), especially for electricity and in rapid increase (with

the multiplying effect of demographic and urban developments);

Modern and intermediate energy technologies along integrated chains (pro-

duction, transformation, distribution and use).

At the same time, SEMC, compared with their northern industrialised neigh-

bours, differ notably by:

Less developed and diversified service sectors and larger agriculture and

handicraft sectors;

Industry still focuses on primary processing with specialisation in labour-in-

tensive sectors (textile, food processing);



Commodity infrastructures are less developed and dense, especially for

transport with a predominance of outdated road passenger and freight fleet;

Informal sectors are more widespread;

Energy poverty is higher and structural as combined with social inequalities

despite increasing potential access to commercial energy;

Use of appliances remains much more limited for most of the customers due

to lack of resources and limited access to recent and diverse equipment.

Table 1. SEMC macro-economic and energy data and indicators(2009)

Popu-

lation,

m

GDP

PPP,

bn

USD

2000

GDP

PPP

per

capita,

USD

Net

energy

im-

ports,

Mtoe

Pri-

mary

energy

con-

sump-

tion,

Mtoe

Final

electric-

ity con-

sump-

tion,

TWh

Pri-

mary

energy

con-

sump-

tion per

capita,

toe

Final

electric-

ity con-

sump-

tion per

capita,

kWh

En-

ergy

inten-

sity

(toe/

1,000

USD

PPP

CO2

emis-

sions,

Mt

Car-

bon

inten-

sity,

kg

CO2/

1,000

USD

PPP

Alge-

ria 34.9 226.3 6484 -111.7 39.8 33.9 1.14 971 0.18 92.5 0.41

Egypt 83.0 362.1 4363 -15.0 72.0 123.5 0.87 1488 0.20 175.4 0.48

Israel 7.4 192.2 25973 19.5 21.6 49.5 2.92 6689 0.11 64.6 0.34

Jor-

dan 6.0 35.4 5900 7.2 7.5 12.5 1.25 2083 0.21 19.2 0.54

Leba-

non 4.2 25.8 6143 6.7 6.6 13.1 1.57 3119 0.26 19.3 0.75

Libya 6.4 70.7 11047 -66.4 20.4 26.1 3.19 4078 0.29 50.0 0.71

Mo-

rocco 32.0 174.8 5463 14.9 15.1 23.9 0.47 747 0.09 41.3 0.24

OPT* 3.8 4.5 1184 1.1 1.1 4.3 0.29 1132 0.24 3.1 0.69

Syria 21.1 78.3 3711 -2.8 22.5 31.3 1.07 1483 0.29 59.8 0.76

Tuni-

sia 10.4 90.4 8692 1.6 9.2 13.7 0.88 1317 0.10 20.8 0.23

Tur-

key 71.9 789 10974 70.3 97.7 165.1 1.36 2296 0.12 256.3 0.32

Total 281.1 2049.5 7291 -74.6 313.5 496.9 1.12 1768 0.15 802.3 0.39

Note. * 2008 data, statistical office of the Palestinian Authority (GDP at current prices).

Source: Key world Energy Statistics, IEA, 2011.

To sum up, SEMCs’ interconnections between energy services and the economy

as a whole represent the intermediate model between those of developing and in-

dustrialised countries. SEMCs show a strong correlation between energy intensity

and GDP per capita. Nevertheless, their energy intensities appear lower than those



of developing countries but higher than in industrialised countries (which have

largely decoupled energy use from GDP). Overall, energy consumption in SEMCs

has major impacts on the main macro-economic parameters of the countries, their

tax revenues and social development.

The above differences with both southern and northern neighbours can explain

the interactions between energy and economic development in SEMCs, including:

An extensive development of commercial energy (in particular LPG, natural

gas and electricity), which has contributed to a first stage of an economic

‘catching up’ effect. Further contribution depends, however, on an effective

and broader access of economic agents to energy (especially electricity) and

availability of the adequate and energy-efficient equipment and appliances;

Decoupling energy intensity from economic growth and development thanks

to more rational and efficient energy use has not yet started (with the remark-

able exception of Tunisia whose primary energy intensity dropped by 27%

between 1990 and 2011).

Figure 2. Relation between GDP and electricity consumption for MED 11 and EU

countries (2009)

Source: Key World Energy Statistics, IEA, 2011.

In the SEMCs, the access to modern energy (in particular LPG, natural gas and

electricity) and energy services (commercialisation based on official services and

0

1 000

2 000

3 000

4 000

5 000

6 000

7 000

8 000

0 5 000 10 000 15 000 20 000 25 000 30 000

Elec consumption (kWh/cap.)

GDP per capita (USD)



tariffs) has been key to the economic development of all sectors, in particular indus-

try and commercial services and also as a condition to attract investment, in partic-

ular FDI. The electrification coverage reaches almost 100% of the population in

most countries, illustrating spectacular progress.

Nevertheless, there are constraints and barriers in access to electricity and gas

connection at an affordable price, especially in the case of small businesses and

handicrafts (often semi-official or informal) in isolated rural areas or dense urban

areas. Also, electricity black-outs primarily affect those areas compromising the op-

eration and reliability of business activities. Thus, improving the effective access of

local businesses to energy services appears to be a priority to enhance their viability.

Figure 2 illustrates the link between electricity consumption and GDP in SEMC.

2.1.1.2 Tax Revenues

In most countries, energy consumption is taxed, providing an important source

of budget revenues, especially through VAT and excise taxes on oil products. Also,

they contribute (or are supposed to) to compensate energy consumption externalities

(roads, health).

Looking at the market price of a barrel of refined oil in OECD countries, energy

taxes account, on average, for 68% of the price while 16% returns to the oil exporters

and 16% are refining and distribution margins (OPEC source). This heavy taxation on

energy in the region is illustrated in the box below concerning Morocco.

Box 1. Energy taxes in Morocco

The contribution of energy taxes to Moroccan public revenue is substantial. From 1980 to

1985, they accounted for 5 to 6% of the total tax revenues. Then from 1986 to 1994, the

oil levy (imposed on the oil products on the basis of a fictitious price of 30 USD/barrel

instead of 15-17 USD) increased this share to between 9% and 14%. Currently, the taxes

on oil product consumption (excise tax and VAT) amount to almost 7% of the total tax

revenues but are well below the government expenses for energy subsidies (5% of GDP).

The annual oil import bill amounted before 2008 between 12 and 15 billion dirhams (12%

of value of the total imports) and rocketed to 30-40 billion dirhams since 2008-09.

2.1.1.3 Social Development


Energy is required to meet basic human needs. Thus, population access to mod-

ern forms of energy is essential for the provision of clean water, sanitation and



healthcare. Also, through the provision of reliable and efficient lighting, heating,

cooking, mechanical power, transport and telecommunication services, energy, es-

pecially electricity, offer numerous social benefits, including:

Job creation in agriculture and industry (especially food processing) in rural

areas;

Comprehensive primary education, thanks to lighting, which allows study af-

ter sunset in rural areas – something that attracts teachers;

Reduced child and female mortality and enhanced gender equality: access to

electricity and efficient fuels and cooking appliances reduce in-house pollu-

tion that causes disease; and partly frees up women from traditional domestic

tasks.

Strong interactions exist between energy consumption and social conditions in

general (IEA/OPEC/OECD/World Bank, 2010), particularly for the situation of

women. The provision of modern, secure and affordable energy services and appli-

ances (cooking, lighting, cooling) enhance a population’s living standards and so-

cio-economic perspectives. On the contrary, the lack of energy, and its inefficient

use create obstacles to social development with stagnating and poor education,

health care and transport and telecommunication systems. Actually what matters is

not only access to energy but also quality, security, modern fuels, appliances and

affordability.

The ratio of annual commercial energy consumption per capita indicates clear

differences in social development:

In countries below 1 toe of annual consumption per capita (and with low elec-

trification and high use of traditional biomass), extensive portions of the pop-

ulation have an income below USD2 per day, with high illiteracy and fertility

as well as infant mortality, and low life expectancy;

Above the annual 1 toe consumption per capita, the social standards remain

low but poverty is less widespread;

For those in the annual range of 2-5 toe per capita, as in several recently in-

dustrialised countries, social conditions improve considerably;

Above 5 toe per capita (i.e., the average annual energy consumption in OECD

countries) living standards are generally high but inequality and energy pov-

erty persists in some countries.

Electricity appears to play an even greater role in improving household welfare.

Electricity is perceived by vulnerable populations as the most important service and

is critical to increasing household income, before water and sanitation (see the

World Bank study on Peru-World Bank, 1999). More recently, access to mobile

telecommunications might also have become one of the key services with the largest



poverty-reducing potential. While the annual electricity consumption per capita in

EU27 countries averages 6,000 kWh, it is only 560 kWh in Africa (120 kWh in

Nigeria).

Situation in southern and eastern Mediterranean countries

Based on the IEA Energy Development Index,10 six SEMCs ranked among the

top 12, including Lebanon (0.850), Jordan (0.773), Algeria (0.706) and Egypt

(0.668) owing to the share of the population with access to electricity and share of

modern fuels in total residential sector energy use (reaching 98-100%). However,

the effective access to those services looks more problematic (for example, energy

poverty and electricity black-outs in Lebanon). Similarly as a strong correlation be-

tween energy services and economic development has been established in SEMC

and other regions, a reliable and affordable access to energy in the residential sector

benefits the population, in particular in terms of health, education, employment and

mobility. For instance, the high access of the Jordanian and Tunisian households to

energy services corresponds to relatively high welfare and lower poverty rates

within the region.

2.1.2. Energy as a Burden

While being an asset for economic and human activities, energy may also have

negative socio-economic impacts, such as excessive energy cost (bills). The usual

policy response is to use subsidies and avoid including most externalities that, in

turn, may generate socio-economic imbalances.

2.1.2.1 Energy Bills

From energy prices to socio-economic effects

Customer energy bills depend on two factors: the level of consumption and the

unit price. For network energies (electricity, gas, district heating), a tariff system

applies, taking into account the level of consumption and the fact of connection and

use of the network. In some cases, a flat tariff (the bill amount is fixed, based on

criteria such as size of flat or number of occupants for residential tariff) may apply.

10 The indicator can be treated as a measure of energy poverty and is calculated for

developing countries as an average of four indicators. Values close to 1 indicate a good

performance. For detailed ranking of 2011 indicator (based on 2009 data) see

(www.worldenergyoutlook.org/resources/energydevelopment/theenergydevelopmentindex).



An increase of energy prices may result from developments in the global market,

higher taxation and/or specific national conditions (scarcity or complexity of access

to energy resources and/or consumers). Higher energy consumption by consumers

can be produced by higher economic activity, search for greater comfort (e.g. air

conditioning), outdated equipment and/or low consumer awareness.

Excessively high energy bills compared to net revenues reduce customers’ pur-

chasing power and hit business competitiveness and household welfare. For the

most vulnerable sectors of the population, high energy bills take up a disproportion-

ately high share of the household budgets and/or reduce accessibility to basic ser-

vices (lighting, food refrigeration);such a situation is known as energy poverty.11

Structurally this increases non-payment rates to the detriment of energy infrastruc-

ture maintenance and investment.

Many field studies (World Bank, 1999; Barnes and Halpern, 2000) in transition

and developing countries indicate that the poor are often keen to pay for standard

energy services but face high access costs (full electricity connection fees of up to

USD600 or deposit and advance payment for LPG bottles) or non-availability of

services (rural areas: low population densities and urban areas: lack of infrastructure

or non-suitable conditions, like in slums). Poor households lack cash reserves for

such fees or lump sums but are generally able to afford the monthly energy service

expenses if the service is reliable. In addition, replacing non-grid household elec-

tricity technologies by the grid prove cheaper12 with much higher quality of services

(e.g. light).

Energy price increases are passed onto most sectors of the economy and society.

In particular, food prices, a major component of the household budget in developing

countries, rapidly increase because of higher transport costs and higher prices of

inputs to agriculture (e.g., fertilizers and diesel to operate tractors and irrigation

pumps). For the poor who use transport services, higher transport costs also decrease

their effective income. Third, as higher energy prices may reduce GDP growth,

household income is reduced.

Situation in southern and eastern Mediterranean countries

Owing to the scissor effect of relatively low domestic incomes and growing en-

ergy dependency (in imports and exports) on volatile energy markets, especially of

hydrocarbons, energy prices in SEMC have significantly increased. At first, fuel

11 Various thresholds are used in EU countries, typically staying around 10% (EPEE, 2009b). 12 Cost of useful electricity from various sources, in USD/kWh (excluding appliance costs):

grid (0.08), dry cell batteries (0.53), car batteries (2.30), kerosene (5.87), candles (13.00) –

Source: Foster, 2000.



prices, in particular LPG (used for cooking and heating) and diesel (local transport

and agriculture) have rapidly increased over the period 2007-11 as a result of the

international oil price surge (the first wave till mid-2008 and then between 2009 and

2011).13 Also, electricity prices, which mostly rely on fossil fuels and thus follow

international price variations, have also increased. Furthermore, like most develop-

ing regions, the Mediterranean region was also hit by the sudden surge in food prices

that culminated in 2008-09.While domestic energy prices in SEMC are lower than

in the EU, the level of household incomes is still much lower and poverty is wide-

spread.

These rapid and steady price hikes, combined with relatively high energy ineffi-

ciency have increased the share of energy in customer expenditure and thus energy

poverty and absolute poverty.14 Energy expenses have accounted for a growing and

significant share of SEMC household consumption baskets, especially for the most

vulnerable who have to allocate an excessively high share of their incomes for basic

fuels (LPG) and electricity, despite the universal consumption price subsidies (see

below). Thus, access to modern energy services has been jeopardised for an increas-

ing share of the poor who see their living standards reduced and/or have to come

back to traditional biomass when available. This has a negative effect on their over-

all socio-economic development and perspectives.

High energy bills and energy burden at the customer level have negative macroe-

conomic consequences, both domestic (e.g. high share of energy subsidies in national

budget, high energy intensity at the expense of competitiveness) and external (e.g.

trade deficit). Along the SEMCs, Morocco, Israel, Jordan and Lebanon are the most

energy-import dependent countries. Over the medium to long term, the trend of high,

volatile and rising energy prices is expected to continue and thus increase the pressure

and imbalances both at micro and macro levels in most SEMCs.

2.1.2.2 Energy Consumption Subsidies


The usual way to address poverty and energy poverty is to provide subsidies.

The OECD defines a subsidy as “any measure that keeps prices for consumers below

13 Automotive diesel prices in Europe and North America increased by around 30% between

2009 and 2011 according to IEA data (www.iea.org/stats/surveys/prices_archives.asp). 14 Unlike the EU, where the Survey on Income and Living Conditions (EU-SILC) regularly

surveys EU households and includes energy poverty, a tool such as an individualised safety

net hardly exist in SMC and thus energy poverty data are scarce.



market levels, or for producers above market levels or that reduces costs for con-

sumers and producers”. More specifically, the IEA defines an energy subsidy as

“any government action that concerns primarily the energy sector that lowers the

cost of energy production, raises the price received by energy producers or lowers

the price paid by energy consumers”.

An international report (IEA/OPEC/OECD/World Bank, 2010) outlined that

“energy subsidies can thus help address market failures or respond to social and

distributional objectives, especially where social welfare mechanisms for directly

providing income support to the poor do not exist”. Direct or indirect subsidies to

customers are supposed to enhance the access of poor groups to modern energy ser-

vices, especially electricity through affordable prices or a support system (e.g.

vouchers). Further to overcoming market failures (e.g. when most efficient technol-

ogies cannot enter a market), well-designed and targeted subsidies can mitigate en-

vironmental problems such as encouraging alternatives to biomass in areas with se-

rious deforestation or a switch to less polluting fuels (natural gas instead of coal or

diesel in heating and transport).

The subsidy aims to reduce the difference between the effective (or market) price

without government intervention and a socially optimal price. Most frequently, sub-

sidies apply in respect to general energy tariffs (for electricity, gas, LPG, motor

fuels) directly or indirectly (for example, cross-tariff subsidies between various cat-

egories of customers; usually business customer tariffs are higher than those for

households).

Subsidies to the energy sector can take various forms (tax breaks, financial in-

centives, grants, R&D credits, etc.) and modalities with a direct or indirect effect on

energy production costs and/or final prices (cf. Table 2 below and section below on

producer subsidy).

Another form of subsidy includes an insufficient integration of externalities in

the final price. Indeed, each segment of the energy chain impacts on its close vicinity

and beyond notably by mobilising land, mineral resources, water and use of infra-

structures, causing local pollution and contributing to global climate change and

thus generating costs for other actors (e.g. cost remediation, health expenses). Thus,

without internalisation of these costs, the fossil fuel industries and also the con-

sumption benefit from an indirect subsidy that is provisionally left apart or partly

covered by the taxpayer but sooner or later will need to be covered by those in-

volved.

While the principle of subsidising energy appears coherent with socio-economic

development (cf. the crucial role of energy above), ensuring that the benefits are

effectively provided to the households most in need has proven problematic.



Table 2. Main types of energy subsidies

Source: “Reforming Energy Subsidies, Opportunities to Contribute to the Climate Change

Agenda”, United Nations Environment Programme, 2008.

Overall, generalised or universal direct consumption price subsidies that benefit

all customers appear rather inefficient as on average only 8% of fossil fuel subsidies

go to the most vulnerable (IEA, 2010). In some cases, they may not even reach the

poor at all (IEA/UNEP 2002).The main reasons for this low efficiency are as fol-

lows:

The poorest households may be unable to afford to pay even for subsidised

energy but above all for the high connection fees and appliance costs. Also,

they may have no physical access to the energy system, for instance, in iso-

lated rural areas or urban slums (no electricity grid connection) or when they

are not considered as viable customers by energy companies;

When poor households are able to purchase energy at subsidised prices, their

consumption is generally modest and sometimes capped (e.g. electricity life-

line or block tariff, which can nevertheless provide a more effective support

to poor and limit distortions towards richer customers). Thus, the share of the

subsidy remains low in their revenues and does not significantly reduce pov-

erty.



In addition, those who generally benefit most from the universal consumption

price subsidies are the wealthiest customers, especially in urban areas, whose energy

consumption is much higher. A subsidy scheme being indifferently addressed to all

consumers, without taking into account income thresholds implies that, in fact, most

of the subsidies benefit the less vulnerable households but paradoxically, poor

households have also to contribute to the financing of subsidies (through indirect

taxes such as VAT).

Low administrated prices with caps or ceilings often create physical shortages

and thus lead to administrative rationing15 that is generally circumvented by middle

and high revenue households through favouritism and corruption at the expense of

the poor.

Universal consumption price subsidies are also criticised because artificially low

energy prices distort the price signals, in particular for medium and large customers

and thus the supply/demand balance. They inflate demand at the expense of the en-

ergy sector (pushed to chronically increase investments to follow rapid demand in-

crease but without sufficient resources), trade balance (either increasing imports or

reducing exports) and the environment (local pollution).By distorting price signals,

they become structural barriers and strong disincentives for more rational and effi-

cient use of energy as well the deployment of renewable energy.

Also, by increasing demand price subsidies deteriorate the balance of payments

and energy supply security by increasing a country’s dependence on energy and

imports. Finally, lower prices of fuels such as diesel or LPG favour their smuggling

to neighbouring countries where the retail prices are higher. As universal consump-

tion price subsidies create artificial prices, they undermine the energy sector eco-

nomic capacities to adequately maintain and invest in infrastructure, including in

more efficient technologies.

Also, the external costs (generally to address the consequences of health and en-

vironmental damages caused by energy production and use) are generally poorly

estimated, especially in the medium- to long-term. This creates a collective but hid-

den and postponed burden to be covered in future.

Universal consumption price subsidies can place a heavy and barely controllable

burden on state budgets as volumes of subsidised energy are large and international

prices are volatile. Governments therefore prefer, for political reasons, to keep sub-

sidies ‘off-budget’ with a universal (administrated) consumption price, especially

with state-owned energy companies, to make them less visible and less subject to

15 In Egypt, the administration rations LPG cylinders, generating abuses and administrative

costs while being largely inefficient.



scrutiny on the funds allocated and their effective efficiency. By contrast, ’on-

budget’ subsidies are more transparent and open to debate, notably by tax- payers.

Generally, the tax-payers (through the state of regional budgets) and/or produc-

tive sectors (through cross-tariff subsidies) finance such schemes. For the first, their

income is affected and for the second, their energy bills increase at the expense of

competiveness (see above). An indirect and significant cost is the lost fiscal revenue

owing to the reduced price as well as the common illegal trading and trade of highly

subsidised fuels. Also, transaction costs may be high and the impact evaluation dif-

ficult to conduct because of the lack of data and specific monitoring of energy con-

sumption and poverty. Thus, what is at stake is the type of subsidy scheme and its

effective enforcement.

The multiple impacts of energy subsidies on the energy supply chain and other

sectors are illustrated in Figure 3.

Figure 3. Social, economic and environmental impacts of energy subsidies

Source: IEA/OPEC/OECD/World Bank, 2010 (from UNEP).

Energy subsidies are generally considered as a major component of the social

safety net for the poor, guaranteeing the availability of affordable goods. However,

the use of universal price subsidy scheme has proven highly expensive, as we argued

above. In policy terms, the intent to address a social issue with only general energy

price rebates is clearly misleading.



Box 2. IEA focus on energy consumption subsidies

Estimating the amount of subsidies can be difficult because of differences in definitions,

methodologies and the transparency of fiscal systems; it is difficult to compare regional or

individual country studies measuring the magnitude and impact of energy subsidies

Fossil-fuel consumption subsidies worldwide amounted to USD409 billion in 2010,

with subsidies to oil products representing almost half of the total. Oil subsidies make

up almost half the total fossil fuel consumption subsidies, with electricity making up 30%,

natural gas 22% and coal less than 1%. Persistently high oil prices have made the cost of

subsidies unsustainable in many countries and prompted some governments to try to reduce

them. In a global survey covering 37 countries where subsidies exist, at least 15 have taken

steps to phase them out since the start of 2010. Without further reform, the cost of fossil-

fuel consumption subsidies is set to reach USD660 billion in 2020, or 0.7% of global GDP

(at market exchange rates).

Fossil-fuel subsidies carry large costs. They encourage wasteful consumption, exacerbate

energy-price volatility by blurring market signals, incentivise fuel adulteration and smug-

gling, and undermine the competitiveness of renewables and other low-emission energy

technologies. For importing countries, they often impose a significant fiscal burden on state

budgets, while for producers they quicken the depletion of resources and can reduce export

earnings over the long term. Furthermore, they are inefficient means of assisting the poor:

only 8% of fossil-fuel subsidies in 2010 were distributed to the poorest 20% of the popu-

lation.

Note: The IEA (as other international organisations) subsidy estimates are based on the dif-

ferential between domestic and international market prices. On its side, OPEC and others

use the cost of production as benchmark.

Source: IEA/WEO 2010 (www.iea.org/weo/Files/ff_subsidies_slides.pdf,

www.iea.org/files/energy_subsidies.pdf).

Situation in the southern and eastern Mediterranean countries

Energy subsidy schemes are widespread in SEMCs. They mostly consist of uni-

versal direct energy price reductions focused on LPG (used for cooking and heat-

ing), diesel (local transport and agriculture) and electricity (general and agriculture).

Subsidies to fuels (LPG, diesel) account for the largest share, followed by electricity

and natural gas. Subsidies have been covering an increasing share of the final energy

cost as the gap between the international market and the social price is widening.

Also, as subsidised universal prices benefit all customers in a context of rapid de-

mographic growth, the nominal and real value of energy subsidies increased over

the period 2002-2010 to become substantial in most countries, often accounting for

the largest share of the government expenditures. In 2007, subsidies to fuels in

SEMCs ranged from below 2% of the government expenditures in Israel, to more

than 15% in Egypt. Also, Syria and Palestine spend more than 20% of their current

expenditures on subsidies (fuel accounting for a large share). In 2009, energy sub-

sidies accounted for a significant share of GDP in Egypt (6% and 11.9% in 2010)

http://www.iea.org/files/energy_subsidies.pdf



(AfrDB, 2012)16 and Syria (5%) but were lower in Jordan (2%)-see also Annex 2:

Energy subsidies in SEMCs.

Furthermore, the 2007/2008 and 2009/2011 price increases confronted southern

Mediterranean policy-makers with serious challenges, particularly in net-importer

countries. As a result of the surge in fuel prices that culminated in 2008, fiscal ex-

penditures on fuel subsidies increased much quicker than planned (the difference

was over 2% of GDP in 2008-ECOFIN, 2011). Also, for most countries the size of

fuel subsidies has been notably higher than those to food (300-600 USD/capita/year

– see Table 3).

Table 3. Energy subsidies in SEMCs (2010 or most recent available data)

Share of

residen-

tial sector

in final

energy

consump-

tion (in

%, 2009)

Subsidy

mechanism

(universal

energy

price sub-

sidy indi-

vidual sup-

port)

Level of sub-

sidy: total/

per fuel (in

% of final

price)

Main

energy

subsi-

dies (in

USD

bn)

Total

subsi-

dies (%

of

GDP/

state

bud-

get)

Financ-

ing

scheme

Overall

efficiency

to reduce

poverty

Alge-

ria 33%

Universal

consump-

tion price

subsidy

Total: 59.8%/

electricity:

35%

Fuels

(8.5),

natural

gas

(NA),

electric-

ity (2.1)

6.6/-

Indirect

(state

company

deficit

are cov-

ered by

the state)

Limited

Mo-

rocco 22%

Universal

consump-

tion price

subsidy

LPG: 250%,

diesel: 66%,

gasoline:

35%, fuel oil:

91%, electric-

ity: NA

4.8

(2011)

5%/

20%

Specific

fund

(CGC)

Limited

(42% of

subsidies

benefit to

rich

household

and enter-

prises)

Tuni-

sia 31%

Universal

consump-

tion price

subsidy

LPG: 144%,

diesel: 37%,

gasoline:

19%, fuel oil:

64%, natural

gas: 86%,

electricity:

44%

1.1

(2007),

2.2

(2010)

5%/

15%

Specific

fund Limited

16 Based on full economic cost (gap between the real price and the reference price).



Share of

residen-

tial sector

in final

energy

consump-

tion (in

%, 2009)

Subsidy

mechanism

(universal

energy

price sub-

sidy indi-

vidual sup-

port)

Level of sub-

sidy: total/

per fuel (in

% of final

price)

Main

energy

subsi-

dies (in

USD

bn)

Total

subsi-

dies (%

of

GDP/

state

bud-

get)

Financ-

ing

scheme

Overall

efficiency

to reduce

poverty

Egypt 22%

Universal

consump-

tion price

subsidy

Total:

55.6%/LPG/

90%, diesel:

75%, natural

gas: 80%,

electricity:

10%

Fuels

(14.1),

natural

gas

(2.4),

electric-

ity (3.8)

11.9%/

15%

(2010)

State

budget

Limited

(only 13%

of the sub-

sidy go to

20% poor-

est)

Israel 23% - - 2%

(est.) -

Jor-

dan 21%

Individual

support and

universal

consump-

tion price

subsidy

NA 2% - Impro-

ved*

Leba-

non 36%

Universal

consump-

tion price

subsidy

Electricity/

NA

4%

GDP/

17%

budget

(only

elec-

tricity)

State

budget Limited

OPT 60%

Universal

consump-

tion price

subsidy

NA NA State

budget Limited

Syria 16%

Universal

consump-

tion price

subsidy

NA NA NA

Notes: fuels mostly consist of LPG and diesel. Social tariffs (lifeline rate) for low purchasing

power users are used in several SEMCs countries (Egypt, Jordan, Morocco, Tunisia).

* Jordan: a detailed evaluation of the new individual support scheme is not yet available but

appears to be much more effective than the previous universal price subsidy (only 7% of the

subsidy used to benefit the 25% poorest households) even if partially reintroduced in 2011.

Sources: IEA, IMF, World Bank, national statistics.

In absolute terms and worldwide, two SEMCs are listed among the top 25 coun-

tries for energy subsidies in 2010: Egypt (6th; total energy subsidies: USD 20billion



or 11.9% of GDP, 250USD/capita) and Algeria (12th; total energy subsidies: USD

10billion or 6.6% of GDP, 300USD/capita) (IEA, 2010).

The funding of these subsidies varies across countries. In the Maghreb, Morocco

and Tunisia created “Caisses Générales de Compensation” (CGC) that are managed

outside public budgets but funded by a state subsidy and/or parafiscal tax. CGCs

make up the difference between the market price and the fixed price for a selection

of energy products (LPG, diesel, electricity) to compensate distributors. In other

countries, social ministries directly intervene through the state budget.

The impact of subsidies in the region is multiple as described above. In particu-

lar, universal energy subsidies encourage rent-seeking behaviour, energy waste and

fuel smuggling,17 and largely prevent supply diversification, in particular with re-

newable energy. As a result, SEMCs’ economies are both energy and carbon inten-

sive and, in contrast to other regions, the situation is deteriorating there. The rapidly

growing energy demand can hardly be satisfied because of the structural underin-

vestment and lack of sufficient maintenance of domestic infrastructure. Finally, the

subsidy schemes are largely inefficient to reduce energy poverty as they remain

captured by higher income and interest groups.

The following Table 4 provides an assessment of the price subsidy mechanisms

in place in SEM net-energy importing countries. The administrated price or univer-

sal subsidy scheme clearly dominates.

Table 4. Domestic fuel price subsidy mechanisms in net energy importing SEMC’s

Situation and reforms Developments

Jordan Increased fuel prices in 2005 and 2008, mak-

ing most fuels reflect international prices. A

committee of representatives from the Minis-

tries of Finance, Energy, and Trade, and from

the Jordanian Petroleum Refinery Company

adjusts the prices of petroleum products

monthly, based on a formula that follows the

changes in the price of Brent crude oil during

the previous 30 days.

In January 2011 Jordan tem-

porarily suspended its auto-

mated adjustment mechanism,

owing to increased social and

political pressure, and re-

duced prices and taxes on

fuel.

Lebanon Fuel price subsidies were de facto eliminated

in October 2008 with the reintroduction of

fuel excise taxes; final fuel prices are issued

weekly via ministerial decree basing the price

on cost (including distribution costs and sta-

tion margins) plus fuel excise taxes.

In early 2011, the Lebanese

government reduced fuel ex-

cise taxes in response to high

world market prices and in-

creasing domestic political

tensions.

17 In particular in the Mashrek (between Jordan, Lebanon and Syria), between Egypt and the

Palestinian territories, between Algeria and Morocco (as official borders are closed) and

between Tunisia and Libya (in particular after the 2011 Libyan uprising).



Situation and reforms Developments

Morocco After ad hoc fuel price rises in 1999 and 2005,

Morocco increased domestic prices in 2006

for all products, except butane/LPG, to reflect

import prices at the time, and introduced an

automated, index-linked adjustment mecha-

nism that would adjust prices in proportion to

international price variations exceeding 2%.

Rising costs of newly built-up

fuel subsidies in 2011 caused

the country to contemplate a

move from universal subsi-

dies to targeted transfers in

the future. In June 2012, the

government increased the

price of automotive fuels

(gasoline +20% and diesel

+14%) to intend to reduce the

increase of fuel subsidies.

Tunisia After ad hoc fuel price rises in 2005 and 2007,

the government decided in January 2009 to

cap the subsidies at the level they reached

when oil cost USD52 per barrel. Whenever

the international price of oil exceeded the ref-

erence price of USD52 per barrel by USD10

over a period of three consecutive months,

prices of petroleum products increase by an a

priori fixed amount. In early 2010 the refer-

ence price was raised to USD60 per barrel

In September 2012, the gov-

ernment increased the price of

gasoline by 7.3% and diesel

by 7.9%.

Source: Fattouh, 2012, author updates.

SEMC’s and Iran country profiles on energy subsidies

Algeria

To guarantee prices accessible to all, the Algerian state subsidises a large number

of food goods of first need but also electricity and fuels. Another objective is to

attract FDI in energy intensive industries (e.g. petrochemical) and support domestic

product competitiveness. The government budget does not officially include energy

subsidies while the authorities provide energy price ‘support’ or ‘implicit subsidies’

by keeping administrated energy prices below the real costs. The Algerian energy

customers, private individuals or businesses pay these products neither at market

prices, nor at cost-recovery prices but at the administered prices. That led to the two-

tier pricing system: lower prices for industrial sector and household consumption,

and international prizes. The subsidy to the price of gas is primarily intended for

industry, in particular petrochemical. For electricity, the subsidy amounts to 35%.

Energy subsidies apply to all consumers because there is no targeted income

support to households. Thus, this system appears very unfair: large companies or

multinationals profit from subsidised prices, whereas most of the poor population

only partly profits from it. The subsequent losses of the state energy companies are

either covered by other customers or by the state budget. The amount of energy

subsidies is not known.



Morocco

The energy price subsidy in Morocco targets LPG (around 250% of final price)

and diesel (66% compared to international prices) that are important for households.

LPG is primarily used by households for cooking and to a lesser extent for heating

but industry and agriculture (water pumping) have been using increasing volumes.

For diesel, the public transport cost is targeted. The price difference is covered by

the Moroccan “Caisse de compensation” (see above) whose deficit more than dou-

bled to 32 billion dirhams18 in 2011 to reach 5% of GDP (around 20% of state budget

or two-thirds of total investment) following the rise of the price of crude oil and its

consumption (4% in 2010 and 2% in 2007).

However, general price subsidies provide benefits to middle income high-in-

come households (with several cars), SMEs and large industries and agriculture ra-

ther than households in energy poverty. Those customers account for 42% of total

energy subsidies. The subsidies granted to LPG and diesel worsens consumption

distortions by directing more consumers towards these energies and without encour-

aging a rational consumption. In June 2012, the government pressed by the contin-

uous increase of fuel subsidies and the lack of financing, increased the administrated

prices of gasoline by 20% and diesel by 14% and is considering possible targeted

support.

Tunisia

General energy subsidy scheme in Tunisia supports administrated prices below

costs. The subsidies (2010) are particularly high for:

LPG: 144% (cost-recovery price at 18.3 dinars per bottle of 13kg against an

administrated selling price of 7.5 Tunisian Dinars (TND)/bottle);

Diesel: 21 % (cost-recovery price at 1.162 dinar/litre against an administrated

selling price of 0.960 TND/litre);

Fuel oil: 75% (cost-recovery price at 738 TND/t against an administrated sell-

ing price of 420 TND/t);

Thus, the subsidy for the oil products would reach 1.070 million TND in 2010

(on the basis of a Brent crude price at 80 USD/bbl and a parity dollar/dinar at 1.48.

In the same way, electricity and gas are very strongly subsidised:

Domestic electricity tariff: subsidy of 44% (cost-recovery price: 180 milli-

mes/kWh net of tax against an average administrated selling tariff of 125 mil-

limes/kWh);

Natural gas: 86% (cost-recovery price: 539 TND/toe against an average ad-

ministrated selling tariff of 289 dinars/toe).

18 17 billion dirhams budgeted and extra 15 billion dirhams.



Also, the feed connection for gas is symbolic for the consumer, since s/he pays

only 140 TND (in monthly instalments, at the rate of 3.5 TND/months) instead of

500 TND. Thus, the subsidy for electricity and gas in 2010 would be in the range of

1.050 million TND including 582 million TND as indirect subsidy and 468 million

dinars for the direct subsidy.

Moreover, the adjustment of administrated prices has not followed inflation lead-

ing to a chronic deficit of the energy companies, in particular STEG, which has to

receive grants from the state. Thus the total subsidy to the energy sector would reach

2.1 billion dinars (€1.1 billion) in 2010 or 11% of the state budget expenditure (5%

of GDP). In September 2012, the government, pressed by the continuous increase

of subsidies and the lack of financing, increased of the administrated prices gasoline

by 20% and diesel by 14%) and is considering possible targeted support.

At the same time, a progressive reduction of the fuel price subsidy levels has

been combined with an active and operational set of actions to reduce sustainably

the fuel consumption (combining energy savings, efficiency and use of renewable

energy, in particular solar water heaters through the PROSOL programme).

Egypt

Energy price subsidies in Egypt are large in relative and absolute terms. The

subsidy rate amounts to above 75% for oil products and natural gas (almost 90% for

LPG, 75% for diesel, 80% for natural gas) and 30% for electricity. This translates

into a heavy annual fiscal burden of 83 billion Egyptian pound (EGP) or USD 5

billion in 2010, i.e. 67% of total subsidies, above 15% of the total state budget ex-

penses, and 11.9 % of GDP19. Furthermore, they increased by 56% between 2007

and 2009 following the increase if international oil prices. They were estimated to

reach a level of 100 billion EGP (USD 6 billion) in 2011 and can slightly decrease

to 90 billion EGP in 2012 but accounting to almost 20% of total national budget

expenses (OME, 2011) and to increase to 120 billion EGP in 2013 further above the

11.9% share in 2010 GDP (AfrDB, 2012). Subsidies allocated to oil products ac-

count for the largest share of expenses (40% for diesel and 22% for LPG) to be

compared with the annual oil and gas exports revenue of USD 10 billion.

As for other countries, only a minor part (29%) of subsidies reaches the lowest

income groups which account for at least 43% of the population. The 20% richest

receive 39% of subsidies while the 20% poorest only 13% (cf. figure 4 below), i.e.,

the wealthiest receive almost three times more subsidies than the poor owing to their

higher consumption of motor fuels, natural gas and electricity. Also energy-inten-

sive heavy industries (including steel, cement, fertilizers, ceramics and glass) and

administration (especially security forces) benefit from the price subsidies.

19 AfDB, 2012.



Price distortions encourage excessive energy consumption, making Egypt’s en-

ergy and carbon intensities 40% and 60% higher than the EU27 average and twice

of MENA average (IEA, 2009). They also aggravate pollution and environmental

damages and lower hydrocarbon export revenues.

Various reform plans of the costly and energy subsidy schemes have been un-

dertaken since 2004. In 2007 the government decreased subsidies on domestic en-

ergy prices, including for energy intensive industries, and decided in 2008 to reduce

domestic energy subsidies by 5% annually. However, non-energy intensive indus-

tries benefited from a six-month freeze in 2010 while inflation was above 10%. In

late 2011, the interim Trade Minister, Mahmoud Eisa declared “the government

would start the phase-out with energy-intensive industries, such as steel and cement,

adding that many of these firms were exporting their products which meant that

“they are exporting ... subsidized energy.”

Jordan

Up to mid-2000s, fuel price subsidies to gasoline, diesel, fuel oil and kerosene

accounted for up to 6 % of Jordanian budgetary expenditures. As in other countries,

the generalised energy price subsidies were largely inefficient to target the most

vulnerable households: the poorest 40% of the population received below 25% of

the fuel subsidies and the 25% poorest households - less than 7%. On the contrary,

the richest 20% of households captured over 40% of the subsidies. In particular this

was the case of subsidy to gasoline as the poorest families did not own cars. Thus,

an International Monetary Fund report qualified the fuel price subsidies scheme as

“pro-rich” (IMF, 2010).

In 2005, the government initiated a gradual phasing out of fuel price subsidies.

In early 2008 the oil product prices were fully liberalised and price subsidies elimi-

nated for all fuels except LPG. It also set up an automatic fuel price adjustment

mechanism. The combined increases of administered prices and specific taxes on

fuel saved the state budget almost USD 200 million per year but increased inflation

that was also caused by the oil price hikes of 2008. Between 2008 and 2010, the

share of energy subsidies in the GDP dropped from 5% to 2% (of which fuels from

1.2% to 0.2%). It is also worth mentioning that the subsequent price signal has stim-

ulated energy efficiency and the use of renewable energy.

In order to compensate for the impact on households - estimated at 4.4% of their

income, the authorities put in place several accompanying measures or a social mit-

igation package. The National Aid Fund (NAF) set up an individual safety net that

provides direct cash assistance in the winter for households earning less than USD

1,400/year to buy heating and cooking fuels. Also, the NAF put in place a social

assistance (monthly aid of around JD 30 per family member with a maximum of JD

180 for a five-member family) targeting specific vulnerable groups including the



working poor, the unemployed and disabled and reinforced its food support pro-

gramme. A lifeline (or ‘block’) electricity tariff for poor households was estab-

lished.20 In parallel, the government raised the public administration wages and pen-

sions at the benefit of around 60% of the total population. This individualised cash

transfer system targets low-income households. Also, the food support programme

was reinforced towards the most vulnerable.

Overall, the annual cost of the individualised social mitigation package was es-

timated between one-third to half of annual energy subsidies and with much better

targeting and effectiveness against energy poverty and poverty.

However, in the context of a price increase of basic goods and the potential po-

litical impact of the Arab Spring, in January 2011 the government decided to tem-

porarily re-set administrated and subsidised prices for selected fuels (for an esti-

mated annual cost of USD 230 million, including food prices) and thus suspending

the automatic fuel price adjustment mechanism. Also the combined effect of soaring

international fuel prices and the interruption of Egyptian gas supplies increased elec-

tricity supply costs to JD 0.19/kWh (27 USDc/kWh) well above the customer tariffs

of 0.083 JD/kWh (11.7 USDc/kWh). This has resulted for NEPCO, the national

power company, in a record deficit in 2011 of USD 2.5 billion or 15% of GDP. This

deficit is expected to exceed USD 3.5 billion by the end of 2012.

Lebanon

Electricité du Liban (EdL), the national power company, relies heavily on gov-

ernment subsidies (USD 3.5-4 billion/year or around 3% of GDP in 2009). For the

last few years the share of electricity subsidies in total primary expenditures fluctu-

ated in the range 10-20%. They primarily target to cover the difference between

actual costs of oil imports and administratively set theoretical and artificially low

tariffs (3 to 6 USc/kWh for the first three tariff tranches in 2010) while the marginal

generation cost is estimated at above 18 USc/kWh, and further up since then (WWF,

2011). This high tariff deficit combines with high debt arrears and very high distri-

bution losses at around 40% at the result of poor bill and grid management. Thus,

EDL has been in virtual bankruptcy (EDL’s deficit in 2010 at USD 2.2 billion) and

faces fierce social conflicts.

Despite this large subsidy, the electricity system has been plagued by daily black-

outs, forcing customers to use individual and private block diesel generators that

involve much higher costs compared to a situation if the grid was functioning

properly. Also this causes serious local pollution and safety risks. This also makes

EdL highly vulnerable to oil price increases. The generalised energy subsidies need

20 Four consumption blocks: 1-160 KWh/month: 32 Fils/kWh; 161-300 KWh/month: 71

Fils/kWh, 301-500 kWh/month: 85 Fils/kWh, over 500 kWh/month: 113 Fils/kWh.



to be reformed to better target the most in need and support the power sector reform

as well as reduce the strain on public finances.

Syria

Confronted with increasingly high expenses for fuel subsidies (amplified by sig-

nificant oil smuggling to neighbouring countries) and lower oil export revenues,

leading to drain foreign exchange reserves, Syria started to reform its fuel subsidy

scheme in 2008, following similar patterns as Jordan (Fattouh, 2012). In 2008 and

2009, diesel price was tripled and those of fuel oil, kerosene and gasoline by more

than a third. At the same time, salaries in the public sector increased and a rationing

coupon system set up (up to 1,000 litres of diesel per year and household at a sub-

sidised price and heating oil allowances for public sector employees and pension-

ers). In 2009, targeted cash transfers based on household income and energy ex-

penses replaced the coupon system. They were estimated to benefit to around half

of the population and to be managed by a National Welfare Fund (with individual

registers). However its creation and the scheme were halted in spring 2011 by the

outbreak of political protests and the civil war since then.

Iran

Until 2010, end-prices of fuels and natural gas in Iran were among the lowest in

the world with diesel prices at a symbolic 3 USDc/l in 2009 (Egypt: 20 USDc/l,

Tunisia: 84 USDc/l, Turkey: 163 USDc/l, Germany: 156 USDc/l) yet there was still

a need to import (due to insufficient and inadequate oil refining capacities). This

resulted in extremely heavy universal energy subsidies that reached USD 90 billion

in 2010 or almost 30% of GDP. To ease this unbearable burden for the budget and

adjust incentives the government decided to increase prices for petroleum products

and compensate lower income earners with cash subsidies. In December 2010, en-

ergy prices were increased substantially: diesel by 1,000%, gasoline by 400%, nat-

ural gas by over 700% and electricity by over 300%. In one year this resulted in

energy subsidies being halved to USD 60 billion (15% of GDP as of December

2011).

At the same time, the government introduced a general cash transfer scheme (in-

cluding for children) that amounted to USD 30 billion. However, the devaluation

that leads to accelerated inflation has reduced the purchasing power of this monthly

cash amount: around USD 45 per person at the end of 2010 and only USD12 in

September 2012 with the actual exchange rates. Also, industries and other customers

received USD 10-15 billion notably to carry out energy-saving investments. Also,

as a result of these changes inflation increased from 10% in 2010 to 14% in 2011

but below the previsions. Since then, international sanctions further increased infla-

tion above 25% in 2012 as it resulted in uncertainty and supply disruptions through



the economy. However, the total cost of this mixed scheme (universal energy sub-

sidies and cash transfer) appears to remain quite unchanged until the consumption

pattern evolves to more rational levels.

Figure 4. Distribution of various subsidies by category of population revenues in

Egypt (2004)

Source: World Bank, 2005.

Comments: It appears that net importers SEMCs have fewer price distortions and

better cost recovery for electricity. However, they face the challenge of how to keep

financing subsidies when oil prices are high and investment is needed to respond to

the rapidly growing demand for energy, particularly electricity.

Impacts: Although perceived as a major component of the SEMCs social safety

nets for the poor (by enhancing access to commercial energy), universal energy

price subsidies have proven largely inefficient at reducing energy poverty; they ac-

tually provide benefits to other private and public sector customers. In particular,

universal subsidies to LPG, gasoline and diesel do not significantly help poor house-

holds but offer benefit to the largest and wealthiest consumers of those fuels. Sub-

sidies impose a heavy burden on government finances (especially in Egypt and Leb-



anon) aggravated by the 2008/2011 oil price surge as well as by economic and de-

mographic growth. They also create substantial distortions in the region's econo-

mies. This growing pressure on state budgets appears unsustainable, in particular in

Egypt and Lebanon.

In SEMCs the fiscal burden of subsidies must be reduced to create more fiscal

space for direct and targeted income support to the poor. Already, some govern-

ments, such as those in Jordan and Tunisia have progressively reduced the scope

and level of price subsidies combined with EE&RE policies (e.g. Tunisian PRO-

SOL: an effective solar water heater support scheme).

2.2. Energy Sector and Its Impact on Socio-Economic Development

While generally perceived as an important contribution to socio-economic de-

velopment, the energy sector may also bring side effects and even generate a burden

for the whole economy (curse effect).

2.2.1. Energy Sector’s Socio-Economic Contributions

2.2.1.1 The Mechanisms at Play – an Overview

A first level of the economic impacts of the energy sector is to consider the var-

ious inputs and interactions with other sectors. The analysis based on input-output

tables confirms that forward linkages of the energy sector (in particular electricity,

and gas, bundled together with water supply) are particularly large in both OECD

and non-OECD countries (Paczynski, 2012). A forward linkage can be interpreted

as a measure of the extent to which a given sector supplies inputs used by other

sectors down the value chain. The energy sector is also strongly interconnected –i.e.

it is trading production inputs with many sectors, especially down the value chain.

Energy-related investments can provide significant contribution to total invest-

ments. Employment effects of energy sector activity can be particularly significant

through indirect channels - i.e. in other sectors cooperating or trading with the en-

ergy sector. Also, from a fiscal perspective, taxation of the energy sector is an im-

portant source of budget revenue.



Beyond those standard interactions, as the size of the energy sector is usually

substantial, ranging from 2-3% to 10-15% of GDP21 in large energy exporting econ-

omies and requiring advanced technology (e.g. efficient oil refining, electricity gen-

eration and transmission) its quantitative and qualitative spillovers are often signif-

icant. Thus, it may create a dependency and become a source of cyclicality (notably

through energy investments).

The socio-economic impacts differ between sub-sectors and energy type. The

centralised energy systems (e.g. oil and gas upstream and downstream, large-scale

electricity generation) require sizeable up-front investment and highly qualified jobs

in its design (R&D) and completion while then operation is less labour-intensive

and does not require high skill level. The new and decentralised renewable energy

systems (e.g. wind, PV, biomass and also energy efficiency) also require significant

investment and R&D qualifications but more highly qualified jobs for the operation

and maintenance. Various and converging studies have estimated that the EE&RE

sectors create for each unit of energy supply between 5 to 7 more qualified jobs than

the traditional energy sector and spread over the territories (EmployRES 2009;

EREC and, 2009).

The combination of advanced technology and demand for skilled jobs stimulates

development of the education and training systems. Also the R&D impacts on re-

search are significant due to the size of budgets engaged and multiplicating effects.

A side effect may be a ‘brain drain’ towards the energy sector, especially the ex-

porting hydrocarbon sub-sector (that can afford higher salaries), at the expense of

other sectors.

2.2.1.2 Situation in the southern and eastern Mediterranean countries

In the SEMCs region, the size and weight of the domestic energy sectors is gen-

erally significant as illustrated by Morocco and Algeria – see the box below. This

substantial share of the sector is exacerbated by the high cost of equipment, mostly

imported, the growing energy demand and the relatively low GDP per capita.

For instance, in Morocco, the energy sector (which mostly relies on energy im-

ports) is the first industrial sector.22 Its important weight in the nation's economy

can be described by:

Contribution to the GDP: 13%

Tax revenues: 9% of total (2010)

21 In the US, oil and natural gas supply 63% of domestic energy, for total sales in the range

of USD 1 trillion, 4.4% of total added value and 6.6% of employment (PWC, 2008). 22 2007 and 2010 data.



Investments: 9 billion dirhams (€ 0.8 billion)23

Direct added-value (except induced activities): 27 billion dirhams of which

electricity (57%) and refining (43%)

Manpower employed: approximately 30,000/40,000 (3.5/4% of total)

Main companies: ONE (electricity), AFRIQUIA(oil products) and TOTAL

Maroc (oil products) that are ranked (based on total sales) as 4th, 6th and 8th

largest country’s companies, respectively

Impact on transport and the port traffic: high (large imports of coal, oil and

LPG)

Impact on regional development: important (energy activities covering the

whole national territory).

In Algeria, SONATRACH, the state-owned upstream oil and gas company, cur-

rently employs 120,000 staff (1.5% of total labour force), has an annual turnover of

USD 57 billion (2010), invests annually USD16 billion, accounts for over 90% of

country’s exports and 76% of total tax revenues in 2006 (Bank of Algeria, 2008). In

addition, it has a key impact on regional development. Its domination in Algeria’s

economy and exports makes the company a major player with great influence be-

yond the sector.

2.2.2. Energy Sector’s Subsidies


As in the case of energy consumption subsidies, subsidies allocated to the energy

sector intend to address market failures (support to development of nascent sec-

tors/technologies such as natural gas and renewables), driven mainly by environ-

mental and energy-security concerns. Energy producer subsidies generally aim to

stimulate or support new investments within the energy chain (production to distri-

bution) and thus alleviate the high up-front investment costs and associated risks.

Subsidy schemes to energy producers can also aim to reduce barriers to market entry

(high cost of modern power generation as gas combined cycle and RE). Subsidies

to a particular energy source or technology aim to stimulate investment (also in

R&D). Energy producer subsidies can also aim to protect employment when com-

pensating economic losses. Subsidies can also combine various objectives simulta-

23 Total increased significantly up to 2010 as only ONE annual investment amounted this

year to 12.5 billion dirhams.



neously such as increase energy security, protect jobs and domestic energy indus-

tries, support regional development and reduce pollution. Energy producer subsidies

support capacity and/or output according to the type of fuels or technologies.

‘Take-off subsidy’ to prepare working playing field for new technologies or en-

ergies appears necessary to attract initial investment and limit the associated risks,

provided its conditions are fulfilled (including transparent scheme, cost effective

with tax return, limited in time). Also, certain types of subsidies can effectively pro-

mote the development and use of less environmentally harmful technologies and

fuels, such as energy efficiency and renewables (UNEP, 2008).

Globally, producer subsidies account for a smaller share of GDP than those to

energy consumption, but their economic impacts can also be significant – either

positively or negatively. In practice, subsidies to energy companies often go to large

capital-intensive projects, such as hydropower dams, large-scale thermal power

plants and oil refineries (UNEP, 2008). However, the combination of significant

investment subsidies and high capital needs channelled for energy investments may

generate internal and external unbalances. Primarily, this may divert long-term fi-

nancial resources at the expense of other priority investment such as education and

health. A World Bank report concluded that “subsidies to the large commercial busi-

nesses that dominate the energy sector or to industries that provide services mostly

to better-off households” are not justified (Barnes and Halpern, 2000).

Subsidies to energy producers can harm economic efficiency in the following

ways:

Subsidies may isolate companies from competitive market pressures and thus

reduce incentives to minimise costs and increase service quality, resulting in

less investment in more efficient technology, insufficient maintenance and

thus less energy- and economically-efficient systems;

Direct subsidies (e.g. grants, tax exemptions, soft loans) without cap can drain

public budgets, especially with high international prices, and generate wind-

fall profits. This translates into lower tax collection and/or debt;

Subsidies to specific energy technologies or fuels may affect the development

and commercialisation of alternatives that might ultimately become more

economically (as well as environmentally) attractive.

Subsidies (through soft loans, new transport networks) to some major facilities,

such as hydropower dams usually displace communities at high social cost, although

a greater access to electricity and water for irrigation can bring significant social

benefits as well. Nevertheless, a global balance of costs and benefits is rarely un-

dertaken during the feasibility and impact studies. Energy subsidies should encour-

age access to the modern energy sources, not to cover operating costs of companies

and to capital intensive projects (World Resource Institute study, 2004).




The rapidly increasing energy consumption in SEMCs has clearly led govern-

ments to allocate growing resources to new supply capacities requested by energy

companies. The administrated tariffs appear too low for companies to raise capital,

turning to the state for subsidies and banks for concessional loans subsidised by the

government and/or international donors. Also, the combined pressure of energy

companies and equipment suppliers on relatively weak public administration pre-

vents study of the economic viability of those investment plans and alternatives such

as: i) demand-side measures which prove cheaper per unit of energy, more effective

and durable; ii) local, small-scale labour-intensive energy facilities, such as biomass

digesters, CHP and solar water heaters (SWH). IFIs have aggravated these distor-

tions by providing loans to build new large and centralised facilities.

2.2.3. Energy Exports and Revenues: a Blessing or a Curse?


Commodity exports, in particular of hydrocarbons, can generate significant ex-

port revenues. Also, the oil market is global and liquid enough to enable oil export-

ers to find buyers and markets relatively easily (also depending on crude qualities).

Crude oil and oil products make up around 14% of the world’s commodity trade –

much more than all other commodities. This high share is maintained despite the

relatively low value added of oil, but is boosted by higher oil prices.24

For natural gas, initial exports by pipelines and long-term supply contracts re-

stricted sales to selected markets. Since the 1990s, the spectacular development of

LNG (using special tankers) and its growing share traded on the spot market (LNG

tankers can supply a wide range of sea terminals) has brought it closer to a global

market.

In absolute terms, the spectacular surge of revenues from oil and gas exports has

further increased their share in trade balances and state budgets of oil and gas-rich

countries. The oil and gas industries are considered as cornerstones of respective

national economies as they ensure their export revenues, employment and technol-

ogy development. Moreover, the prevailing views in the 1950s and 1960s, somehow

24 In January 1999: around USD 10 a barrel, June 2008: a peak at USD 145, early 2012:

above USD 100.



revived in the 1990s, is that increases of income per capita would lead to socio-

economic improvements.

However, large hydrocarbon revenues have also proven to generate negative side

effects in emerging economies that can hamper their growth. Oil and gas export

revenues generate structural imbalances called as the resource curse, Dutch dis-

ease25 or ‘oil syndrome’ (African Economic Research Consortium, 2007; Ross,

2010) including:

Revenues and debt: the linear anticipation of future export revenues often

creates the illusion of financial solidness and leads to the excessive use of

sovereign debt (by government and state companies). High nominal oil reve-

nues also create an illusion of wealth but the absence of macroeconomic

framework and strategy and inter-sector interactions generally fails to gener-

ate a virtuous circle. This can lead to the political use of revenues for short-

term and narrow objectives, e.g., increased employment in public administra-

tion, higher salaries in the public sector, the import of luxury goods and mil-

itary hardware. At the same time, investments on infrastructure and structural

development (e.g. education, health) lag behind the demand for them leading

to various bottlenecks and distortions. Historical experience shows that in-

creasing public spending without a strong development strategy does not lead

per se to higher and sustained growth and effective socio-economic develop-

ment, and thus to poverty reduction. On the other hand, fiscal expansion fol-

lowed by reduction of oil revenues (as result of decline in oil prices) may lead

to abrupt cyclicality that weakens poverty reduction policies.

Monetary imbalances: the inflows of foreign currency revenues and subse-

quent appreciation of the national currency26 harms the competitiveness of

other exports (of low and intermediate technology levels). Also, excessive

inflow of oil revenues pushes central banks to raise interest rates to curb in-

flation, but this discourages non-commodity sectors from investing. Large fi-

nancial flows can also generate financial and real bubbles, in particular, real

estate ones. Such financial imbalances are at the core of ‘Dutch disease’.

25 Following the Netherlands’ large natural gas discoveries and exports in the early 1960’s,

wealth increased dramatically and raised the value of the Dutch currency by 30%. As a re-

sult, competitiveness, especially of the manufacturing sector dropped, inflation rose and un-

employment shot up. 26 Under a fixed exchange rate regime, the conversion of foreign currencies into local cur-

rency increases money supply and, consequently, leading to higher domestic prices and real

appreciation of the national currency. Under the flexible exchange rate, real appreciation

follows on from nominal appreciation.



Dependency and volatility: the high share of hydrocarbons in total exports

and fiscal revenues creates a structural dependency, which prevents diversi-

fication and creates structural imbalances that are aggravated by commodity

price cycles.

Financial management and investment: in a rent-seeking economy, the ca-

pacity to manage exploitation of resources in a timely manner and spend re-

source-related revenues in a productive way is a serious political challenge.

High and potentially unsustainable revenue flows (as not linked to a domestic

productive sector) need to be channelled, notably to avoid financial and real

bubbles and the potential ravages of Dutch disease. Imported inflation and

speculation on rare goods and services increase domestic prices and even cre-

ate rationing that harm other business competitiveness and household reve-

nues. A country may either accumulate more foreign reserves (often in the

form of long-term ‘oil funds’), or increase spending. If the decision is to

spend, is it better in consumption or investment? Empirical evidence suggests

that in most cases resource rents fail to reach domestic sectors and generate

balanced and sustained growth. This is also due to limited sectoral synergies:

oil rents do not easily spread to domestic manufacturing industries.

Trade imbalances: a trade surplus hides a structural imbalance as hydrocar-

bon export countries sell low value-added raw materials but import advanced

technology equipment, consuming goods and services. Thus, the terms of

trade are clearly unfavourable and deteriorate over time. Domestically, the

low oil and gas added value combines generally with low employment

(skilled jobs being filled in by foreign expatriates) and limited technology

transfers. Also, oil and gas prices are fixed on international markets under the

influence of powerful integrated oil oligopolies the ‘majors’ or ‘Seven Sis-

ters’ – that initially controlled most of world hydrocarbon supplies and sub-

ject to financial interests and speculation. Oil prices are therefore not trans-

parent; they are also highly volatile, a situation exacerbated by the currency

volatility (USD, EUR) prompted by hidden devaluations. Furthermore, most

of the added value along the oil supply chain is realised downstream (cf.

OPEC ratios on the oil value share). This also relates to frequent abuses of

terms of exploitation of resources and sharing revenues and tax contributions

by oil companies (e.g., using offshore tax heavens to reduce taxes in export-

ing and importing countries). This role of international oil companies may

explain part of these imbalances. But, if the big companies were mainly to

blame for the oil syndrome, then nationalisation should have cleared this is-

sue. However, the 1970s nationalisation by various oil countries actually

made the problems worse.



Governance: another challenge is related to transparency in public govern-

ance and revenue management in the context of government secrecy in re-

spect to oil revenues. The Revenue Management for Extractive Industries

(EIR, World Bank led-initiative) (EIR, 2003) identifies 11 obstacles to ade-

quate governance: “1) lack of participatory democracy; 2) corruption, lack of

transparency and accountability; 3) excessive military and security expendi-

ture; 4) lack of capacity for long-term planning and monitoring; 5) insensi-

tivity to in-country context; 6) lack of good fiscal and macro framework, poor

revenue management; 7) lack of community access to benefits; 8) foreign in-

vestment dominance and lack of local domestic enterprises; 9) weak legal

system; 10) insufficient technical capability; and 11) poor communication ca-

pacity and resources”. Almost all oil export countries share weak institutions

and low governance indicators. For instance, African oil exporters are char-

acterised by weak rule of law, malfunctioning bureaucracy and a democracy

deficit, with a negative impact on the economy. Also, poor corporate govern-

ance in state-owned energy companies is detrimental to their performance.

They often interfere in public policies and decisions, owing to their economic

and political weight.

Overall, the combination of those negative economic, financial, governance, so-

cial and environmental effects has been experienced by almost all commodity ex-

porters and led to a paradoxical reduction of the GDP per capita over time. Among

65 countries with large natural resources, only four (Botswana, Indonesia, Malaysia

and Thailand) managed to reach both: (a) long-term investment exceeding 25% of

GDP on average from 1970 to 1998 and (b) per capita GDP average annual growth

above 4% over the same period. As an illustration, the Organization of Petroleum

Exporting Countries (OPEC) as a whole experienced a negative rate of GDP per

capita growth (Gylfason, 2001; Nili, 2003) over a similar period. Among its mem-

bers, Venezuela ranked among the ten richest nations at the beginning of the 19thcen-

tury and then as a wealthy country during the 1970s. However, despite its important

oil exports, it is downgraded to the level of a middle-income country (GDP per cap-

ita: 65thout of 184, 2010). Similarly, Nigeria’s GDP per capita of USD400 is far

below the low-income countries’ average, despite USD300 billion of oil revenues

for over 25 years.

Furthermore, according to UNDP Human Development Index, the living stand-

ards in most oil and gas producers (Nigeria ranked 156th out of 187 and Venezuela

ranked 73th) (UNDP, 2010) are similar or lower as the poorest countries of sub-

Saharan Africa. These findings indicate that large oil revenues do not necessarily

lead to economic growth and development but, on the contrary, to sub-development.



Overall, rent-seeking strategies appear detrimental to economic growth and lock

economies and public budgets into dependency on a single sector and one commod-

ity market (Ross, 2010). This is the so-called ‘paradox of plenty’ where natural re-

sources fail to generate sustainable benefits and, on the contrary, lock economies

into vicious circles and create various economic, financial, social and environmental

distortions.

These structural and complex issues are generally imbricated and thus difficult

to address separately without a global and sustained politically supported reform

plan. They require ambitious policies for hydrocarbon export economies to create

the conditions of sustained and balanced growth (see Part 3 below).


The SEMCs economies that rely extensively on hydrocarbon exports (Algeria,

Libya and, to certain extent, Egypt) also face the oil curse effect. Their poverty is

widespread and economic growth slow, despite an abundance of extractive re-

sources. An illustrative case of the oil syndrome/paradox is Algeria (see box be-

low).

Box 3.Oil paradox in Algeria

According to various studies (e.g. Benabdellah, 2010), the Algerian economy presents all

the symptoms of oil syndrome and of the Dutch disease, but not its main mechanisms. It

indeed presents a sectoral characteristic27 of the oil syndrome:

A vigorous growth of the hydrocarbon sector, which mobilised investments worth

of USD 21 billion between 2000 and 2005 and then USD 32 billion between 2005

and 2009 (or 20% and 22% of the GDP, respectively) and accounts for 97% of total

exports;

A strong growth of the service sector, in particular public works (thanks to large

public investment programmes) and commercial services (both with relatively low

labour-intensity);

A decline of the industrial manufacturing;

A structural inflation and speculative bubbles;

Hydrocarbons account for almost 50% of GDP and public spending represents

above two-thirds of GDP.

The economy tends towards the oil syndrome, however, without the transmission channels

of the Dutch disease. Indeed, the oil boom in Algeria that occurred since 1999 did not

27 For more details and extensive analysis and data, see MEDPRO Technical Report No. 7

“Algeria’s failed transitions to a sustainable polity: Coming to yet another crossroads”, Ha-

kim Darbouche, 2011.



overvalue the national currency. The real effective exchange rate (REER), the main trans-

mission channel of the Dutch disease depreciated by approximately 20% since 2000.

This is because the Bank of Algeria sterilises part of international reserves by recycling

them on the international financial markets28. Stabilisation of the REER constitutes a key

objective of country’s economic policy. As result, the Bank of Algeria has accumulated

USD 170 billion of international reserves in 2011; an amount equal to the country’s GDP.

Depreciation of the dinar (with the market rate up to 40% lower than the official rate) is

also a result of the relatively poor economic performance of Algeria, its economic and

political uncertainties and high spontaneous dollarisation. Furthermore, Algeria suffers

from capital flight, which was estimated by the Global Finances Integrity (GFI)29 to be at

least USD 26 billion over the period 1970-2008.

Actually, Algeria’s macro-economic performance (GDP annual average growth of 3.7%

and real GDP per head increase by 22% over 2000-2009, annual inflation at 4-5%) –, a

spectacular reduction of the sovereign debt (repayment of USD 25 billion) and) is not re-

flected in the standard of living and the access of most of the population to basic services

(education, health, housing and even energy, in particular electricity subjected to chronic

cuts) and to employment (even if official unemployment rate decreased from around 30%

in early 2000s to 10% but it is estimated to be at least 15% and is chronic for youth labour

force (30%), in particular, young graduates (40%) with a high share of temporary and pre-

carious jobs. In fact, approximately one Algerian in four lives below the poverty line and

the rate of illiteracy exceeds 22%, whereas inequality of income has increased (20% of the

population holds over 50% of the total wealth). Actually, Algeria ranks 94th in the UNDP

Human Development Index (2010).

Furthermore, according to GFI (2011), Algeria faces various governance problems, includ-

ing leaking of oil revenues to financial offshore centres, overspending in security and de-

fence and lack of budgetary transparency and accountability. Using the hydrocarbon reve-

nue, in 2001 the government launched a large public investment programme (2001-2009:

USD 200 billion and 2010–14: over USD280 billion) focused on infrastructure and access

to public services (housing, water, education, energy and health). Nevertheless, “while the

transformative impact of these efforts on the economy has been palpable, their effect on

the long-term prospects for growth and sustainability is less certain” (MEDPRO/Dar-

bouche H., 2011). The public investment programmes appear not yet integrated in a long-

term economic development strategy, in particular to diversify the economy and reduce its

dependence and vulnerability on a single sector and commodity market. Therefore, “the

risk of being thrown back into a severe socio-economic crisis is as real today as it was 25

years ago, when a prolonged period of depressed oil prices had dramatic consequences for

Algeria” (MEDPRO /Darbouche, 2011).

28 Algeria also established an oil fund, the Arab Oil Fund that was administered by the Af-

rican Development Bank until its funds were fully disbursed. 29 According to GFI (GFI, 2011), the capital flight from Africa amounted to USD 854 billion

between 1970 and 2008, or four times the total amount of foreign debt of the continent In

case of Egypt it amounted to USD 70.5 billion, in Libya - to USD 43 billion, in Morocco - to

USD 25 billion, in Tunisia - 16 billion USD and in Syria - 23 billion USD.



3. Scenario and Policy Approach for Integrated Socio-Economic Development and Energy/ Climate Policies in SEMCs

Based on historical analysis, international experience and best practices, SEMCs

need to take a global and cross-sectoral view. Their public policies must address

current deep and accumulating socio-economic difficulties and negative vicious in-

teractions between socio-economic processes and energy, and be well structured

and systemic to overcome such challenges. An integrated approach to the SEMCs

energy sector should rely on two main pillars: i) socio-economic reforms; ii) inte-

grated energy policy.

3.1. Socio-Economic Reforms to Build the Fundamentals

To overcome existing problems and distortions such as an excessive energy bur-

den, massive subsidies or the oil syndrome, SEMCs need to undertake thorough

and sustained socio-economic reforms, backed by solid strategies. Those strate-

gies would need to be supported and incorporated into laws, regulations, and con-

tractual obligations to structure and articulate the reform process. Such reforms

would first need to build a solid socio-economic framework that has proved essen-

tial in other regions (Central Europe and the Baltic States in the 1990s) and Tunisia

and Jordan, which are among the most advanced countries in the southern Mediter-

ranean region. The reform priorities should include:

1. Building strong institutional national capacities (in expertise and adequate

staff numbers) within a robust set-up (national economic and social ministries

and their agencies, including a statistical office). Coordination between

SEMCs’ national institutions, but also with regional and local institutions, is

crucial.



2. Developing a solid socio-economic statistical system (including database and

indicators) and economic tools (e.g. projections and forecast) in line with in-

ternational standards (Eurostat and UN) to form a transversal and multi-sec-

toral information system (including ‘dash board’ indicators) to assist SEMCs

policy design, evaluation and investment decisions.

3. Designing, implementing and monitoring multi-sectoral development strat-

egy with medium to long-term vision. The strategy priorities (notably, pov-

erty reduction and infrastructure development)should need to be based on a

detailed diagnostic, allowing identifying global and sectoral priorities (in par-

ticular promising sectors as those related to the ‘green’ economy)30, qualita-

tive and quantitative objectives (with related indicators), timetable and clear

responsibilities of implementation. The design and evaluation process would

also include an open and true dialogue and consultation with key stakeholders

and civil society (think tanks and NGOs) to ensure ownership and feedback

on the strategy. Such national development strategy would serve as the refer-

ence for all socio-economic public policies. It would also need to be regularly

monitored and evaluated.

4. Improved governance: Comprehensive national strategies backed by strong

political will and capacity building can become powerful tools to enhance

both SEMCs’ public administration as well as corporate governance of state

companies. For both entities, the objectives include ensuring accountability

to political/public authorities and the public/clients. The adoption and intro-

duction of clear standards and procedures would reinforce management ca-

pacities and social dialogue. Independent evaluations would regularly assess

progress and fields for improvements. Also, the enforcement of the rule of

law by an independent judiciary appears as a cornerstone reform in this pro-

cess. Specific anti-bribery action plans can complement the approach on this

key item.

5. Oil revenue management. The hydrocarbon exports generate substantial risks

and imbalances that need to be managed and mitigated by SEMCs’ govern-

ments. Besides, economic policies would need to ensure that their benefits

contribute to the sustainable development of the human, social and physical

capital.

30 Jordan and Morocco already adopted green economy strategies: “Towards a Green Eco-

nomy in Jordan”, http://sustainabledevelopment.un.org/index.php?page=view&type=400

&nr=678&menu=35; “Mobilisation pour unecroissanceverte au Maroc”, (www.mem.

gov.ma/publucations/mobilisationourunecroissanceverte.pdf, www.unep.org/ greeneco-

nomy/Portals/88/documents/advisory_services/countries/Morocco%20final.pdf).

http://sustainabledevelopment.un.org/index.php?page=view&type=400%20&nr=678&menu=35

http://sustainabledevelopment.un.org/index.php?page=view&type=400%20&nr=678&menu=35

http://www.unep.org/%20greeneconomy/Portals/88/documents/advisory_services/countries/Morocco%20final.pdf

http://www.unep.org/%20greeneconomy/Portals/88/documents/advisory_services/countries/Morocco%20final.pdf



The management of oil revenues would need to combine strict governance

standards and macro-economic tools in line with multi-sectoral socio-eco-

nomic development strategy. To improve the oil revenue management and

enhance population welfare and quality of life the following actions are crit-

ical:

Ensure transparency of oil revenues and their disposition; this includes

lifting governmental secrecy on the revenues (possibly using the sup-

port of technical assistance and experience of other countries subscrib-

ing to the Extractive Industries Transparency Initiative-EITI). An in-

dependent oil fund has proven to be an effective tool to manage oil

revenues and ensure that their allocation corresponds to the decisions

that are open to public disclosure.

Based on the economic development strategy, and in consultation with

principal stakeholders, clear and flexible rules should guide allocation

of oil revenues. The main short-term objective would aim to prevent

the Dutch disease thanks to respective monetary and fiscal policies

(following the experience of Algeria). In the medium- to long-term, oil

revenues should support economic diversification, investments in pub-

lic services (education, health), R&D, public infrastructure (telecom,

transport, energy) and poverty reduction. Such investments should

generate positive effects, in particular, increasing competitiveness of

the entire economy.

The challenge is both to reduce corruption and rent-seeking activities,

to enable oil rents support economic growth and social development

through productive investment. Also, it could help to progressively

move away from a strong dependence on non-renewable, low-added

value and volatile resources to a more diversified and competitive in-

dustrial model.

A good practice was developed by Chile, which has addressed the key chal-

lenge of managing large revenue inflows following commodity windfalls

(copper prices in the late 1980s, early 1990s and since 2008). In particular,

the government imposed a tax on ‘hot’ money inflows (‘encaje’ mechanism)

while welcoming longer-term diversification of investment, promoted by a

strong national economic development strategy.

6. Poverty reduction strategy- the reforms of commodity subsidies. Maintaining

the current energy subsidy systems in the SEMCs seems fiscally and econom-

ically unsustainable, especially after the increase of international commodity

prices in recent years. In addition, they appear largely inefficient at reducing



poverty. Thus, in oil exporting and importing countries, the effective reduc-

tion of poverty depends on adoption of comprehensive national poverty re-

duction strategies. Nonetheless, experiences in the region indicate that the

social consequences of the subsidy reforms can have far-reaching political

implications, for example, public unrest. Thus, policy-makers need to take

into account both economic and social constraints (including transaction

costs) and the potential political consequences.

Based on detailed data collection and qualitative poverty assessment on a

broad range of items, specific tools such as social cost-benefit analysis

(SCBA) can evaluate the impacts of various subsidies (and alternatives) on

social welfare and their effectiveness. Such diagnostic serves to identify pri-

orities and develop direct and individual poverty reduction schemes based on

reliable database of poor households.

Direct support, in the form of direct income transfers and lifeline tariffs (spe-

cial low rates for small and poor users) for water, electricity and gas (instead

of individualised vouchers)31 can individually support the neediest SEMCs

customers for selected products (food, energy). The effectiveness of lifeline

tariffs32 depends on the targeted population being connected to the distribu-

tion networks and the possibility to collect data on each household’s con-

sumption.

As outlined by various studies and best practices, direct support has proved

to be more effective at reducing the loss in real income due to higher com-

modity prices than universal price subsidies and cross-subsidies. Besides,

such well-targeted direct safety nets are more cost-effective, thus reducing

the burden on government finances (it also becomes possible to increase the

level of support to poorer households while reducing the global envelope) and

have more durable effects. Its monitoring and evaluation are also easier. They

have also the advantage of involving in persona the households, enhancing

the ownership and establishing a channel of information and advice on related

topics (education, health). It means that social policy moves from primary

reliance on in-kind subsidies to cash transfers, provided that governance is

improved to avoid misuses.

31 Vouchers provide insufficient price signal to customers and, thus reduce incentives (such

as to save energy and use it more efficiently). 32 The example of Cape Town (South Africa): below 450 kWh of electricity per month, the

first 50 kWh are free of charge, a social tariff applies for the next100 kWhand above 150

and then 350 kWh the tariff successively increase by 32% (www.scenicsouth.

co.za/2011/07/city-of-cape-town-electricity-tariff-structure-1-july-2011/).



Such safety nets require an extensive data collection notably to develop a reli-

able database of poor households and individual administrative follow-up that

may be carried out by a specific public agency (Jordan National Aid Fund) and

/or local recognised NGOs. For energy support, short-term support can also be

complemented by structural measures such as basic energy efficiency (e.g. flat

insulation, low consumption Class A appliances) that reduce at source the level

of consumption (with rapid payback at market prices) and thus the cash sub-

sidy. In parallel, a progressive and scheduled phasing out of the inefficient uni-

versal price subsidies and cross-subsidies complements the subsidy reform. It

could have direct positive economic effects, particularly if it significantly re-

duces economic distortions with market price signals and budget deficits. A

global IMF study backed by country experiences (e.g. Jordan) concluded that

keeping energy prices liberalised is a robust approach to prevent a resurgence

of universal subsidies (IMF, 2011).

Overall, balanced reformed subsidy schemes should be:

Soundly based: direct subsidies should be justified by a thorough study of the

associated costs and benefits. Also, they should not conflict with other instru-

ments and goals;

Well-targeted: direct support should be directed and limited to a clearly de-

fined group within the most vulnerable on an individual basis;

Practical: the overall amount of a subsidy should be affordable for the state

budget and the administrative cost transparent and reasonable;

Transparent: information on the total subsidy funds and target groups should

be disclosed;

Limited in time with regular evaluations to avoid consumers and producers

becoming overly dependent on this support, to limit opportunist behaviours

and avoid costs spiralling out of control.

Direct income support has proved to be more effective than universal price sub-

sidies and cross-subsidies. Besides, well-targeted direct safety nets are less costly

and easier to evaluate. The reform in Jordan proved it can be both feasible and ef-

fective. However, the current political turmoil in the region makes it politically and

socially difficult to pursue such reforms. For example, the government of Jordan

decided to return to the subsidisation of fuel prices in 2011.



3.2. Integrated Energy/Climate Policy

The integrated energy policy in SEMCs should include at least two components:

1. National energy strategy

Each SEMCs would benefit from a comprehensive and long-term na-

tional energy strategy remaining in synergy with other public policies

(climate, transport, regional, social, etc.) and coherence with other

countries’ strategies.

The strategy may rely on at least three pillars(WWF, 2010; IEA, 2008):

- Energy security and access: there is significant potential to di-

versify fuels, sources and suppliers; put in place emergency cri-

sis management (combination of contingency plans and oil

stocks); finalise rural electrification and promote sustainable bi-

omass; increase access to energy services for the poor, notably

through social tariffs for electricity and LPG (when relevant) for

poor households combined with an incentive scheme for A or

A+ class energy equipment and basic insulation of buildings.

- Structural and regulatory reforms: within a clear, effective and

stable legislative and regulatory energy framework, independent

regulators should progressively set tariffs based on cost-recov-

ery level, in parallel with the improvement in security and qual-

ity of supply. Anyhow, phasing out of universal price subsidies

and cross-subsidies would need to be gradual with clear time ho-

rizons (e.g. annual 5% price adjustment over a 5-10 years pe-

riod) and complemented by an individual support system com-

bining lifeline/social tariffs and targeted subsidies to the poorest

parts of the population. The pricing policy should aim to both

enable the poor to access energy services (with eventual individ-

ual support) and have energy tariffs that reflect its real costs (in-

cluding investment and maintenance, and progressively, exter-

nalities, for example, health and environmental expenses).

- Energy sector restructuring: SEMCs’ governments face the chal-

lenge of improving corporate governance in energy monopolies

and their accountability to public authorities and clients, move

natural monopoly functions to special state-owned entities (e.g.

transmission system operator (TSO) owning and operating the



electric and gas grids) and lift technical barriers (e.g. national

grid bottlenecks to connect planned RE capacity and intercon-

nections).

o A crucial reform relates to separating the function of pub-

lic policy from regulation and policy enforcement, and

management of the public energy sector. This would limit

conflicts of interest and political interference in energy

sector operations.

o Developing a reliable statistical system on energy (in par-

ticular, energy balances, price database and indicators as

developed within MEDSTAT) and economic tools (e.g.

demand forecast, least-cost plan) in line with international

standards and in synergy with a national data system.

Once those crucial reforms are in place, sustainable energy policies can de-

velop, as in Tunisia since the mid-1980s. Indeed, with a more balanced regu-

latory framework and cost-recovery prices, energy efficiency and renewable

energy can become more attractive for private and public investment.

2. Sustainable energy policy

Better energy efficiency (EE) in combination with an increased use of renew-

able energy (RE) sources can remove some of the structural barriers of the

SEMCs’ energy sectors and move away from excessive dependence on fossil

fuels and diversify supply.

The first priority in the SEMCs is to enhance the efficient use of energy,

which offers large and affordable potential (cf. MEDPRO paper

MEDPRO/Blanc F., 2012). Along the energy chain, the efficiency of energy

supply and use can be improved by about 30% as demonstrated by compre-

hensive studies carried out in Tunisia (ANME, 2006; Plan Bleu, 2007) and

the average performance of industrialised countries. This can be achieved by

using the most efficient technologies already available. They are less expen-

sive per unit of energy than increasing energy supply, environmental impact

notwithstanding. Energy efficiency is a cost-effective tool to reduce high en-

ergy intensities and waste, and thus consumer energy bills. It also helps to

control energy demand; demand and supply of energy needs to be better in-

tegrated to better satisfy customer needs (not only supplier interests).

Furthermore, EE&RE generate more and higher skilled jobs than fossil and

nuclear energy (EmployRES 2009; EREC and, 2009). Decentralisation of en-

ergy sources offers economic benefits and increases security of supply as well

as reduces investment in large transmission capacities.



Based on disaggregated sectoral data on energy consumption, the strategy

could identify energy saving potential by sector/sub-sector and rank them by

priority (by cost and saving potential) and then propose concrete measures

(behavioural changes and investments).

These measures and associated targets need to be packaged in detailed na-

tional sustainable energy (EE&RE) action plans. The smart design and effec-

tive implementation of these plans depends on the strength of public institu-

tions (energy ministries and agencies) and their human capacity.

Improved energy end-use efficiency and increased use of renewable sources

of energy can ease energy demand and supply tensions and contribute to eco-

nomic and social development. To stimulate better use of energy and of re-

newable energy (in particular solar technologies) a key measure is to set a

clear and stable regulatory framework, including transparent permits proce-

dures, non-discriminatory and open grid access and effective RE support

schemes.

Sustainable energy policy is naturally interlinked with the environmental pol-

icy, in particular with mitigation of air water and soil pollution and emissions

of greenhouse gases (GHG). In addition, carbon financing (CDM) can play a

role in the co-financing of EE&RE investment projects (generally up to 10%

of total costs).

3.3. Regional Energy Cooperation: Initiatives and Challenges

While national reforms and integrated energy strategies are essential to over-

come SEMCs’ difficulties, they are not sufficient to tackle international and cross-

border issues, e.g. bilateral and regional electricity and gas interconnections.

Thus, both intra-Med and EU-MED energy cooperation appears crucial to build

regional/sub-regional infrastructure (e.g. power and gas interconnections within the

Maghreb and with the EU) and market (e.g. Maghreb electricity market). Both joint

infrastructure and regional markets can offer:

Economies of scale on investment and serving a large regional market;

Higher security of supply (through interconnections);



Access to the least costly and most diversified supplies as well as export mar-

kets, in particular the potential to export renewable electricity to the EU (as

per the EU Renewable Directive) 33

Plans and ambitions of the MSP

The Mediterranean Solar Plan (MSP) launched in 2008 within the Union for the

Mediterranean (UfM) has the objective to foster and catalyse both EU and SEM

efforts. Indeed, the highly ambitious investment under the MSP initiative aims to

introduce 20 GW generation capacity from renewable energy by 2020. It aims to act

as a catalyst for reforms and joint EU and SEMCs’ investment. It is backed by two

other major pan-regional initiatives:

Medgrid (ex-TRANSGREEN) made up of major TSOs and utilities34 with

ambitions to develop regional electric interconnection lines, in particular to

export renewable electricity from the south to the north of the Mediterranean.

DESERTEC, a strong private-led investment initiative, bringing together

large multinational energy groups35 and aiming to build a network of renew-

able electricity projects in MPCs (in the range of 20 GW for an estimated

total investment of €30 billion, and up to 80billion with infrastructure costs)36,

mostly solar electricity projects for the EU electricity markets. DESERTEC

already signed framework agreements with Tunisia37 and Algeria.

In May 2012 in Rome (Italy), the Electricity Transmission System Operators of

the northern and southern rims of the region established Med-TSO, a cooperation

platform of Mediterranean transmission system operators. Med-TSO’s main objec-

tives are to “coordinating the development plans and the operation of the grids in

MED-TSO countries, encouraging the integration of their electricity systems and

33 The Directive 2009/18/EC (Art. 9) provides the possibility to import significant volumes

of renewable electricity (REL) from third countries in the coming decade. It enables EU

Member States (MS) to import renewable electricity from outside the EU and to incorporate

it into their RE target for 2020, something that remains challenging for several MS). 34Abengoa, AFD, Alstom, Areva, AtosOrigin, CDC infrastructure, EDF, Nexans, Prysmian,

RED Eléctrica de España, RTE, Siemens, Taqa Arabia-(www.medgrid-psm.com). 35 Including Munich Re, Deutsche Bank, Siemens, ABB, E.ON, RWE, Abengoa Solar, Ce-

vital, HSH Nordbank, M & W Zander Holding, MAN Solar Millennium, and Schott Solar

(www.desertec.org). 36 Other estimates at the 2050 horizon indicate € 400 billion- (http://en.wikipe-

dia.org/wiki/Desertec#cite_note-epoch-10). 37 Pre-feasibility studies for pilot projects worth 500 MW: 250 MW CSP plants, 125 MW

photovoltaic and 125 MW wind.



the implementation of common criteria and harmonised, transparent and non-dis-

criminatory rules of access to and usage of grids”. 38

Towards a more integrated and balanced MSP and EuroMed energy cooperation

The MSP, by putting high political priority on sustainable energy and setting

ambitious targets to 2020, has already proved useful to generate broad policy dis-

cussions and new initiatives. Its focused and transversal approach, with political

support, has the potential to further advance the reform agenda39, something that is

needed in most MPCs to make effective large EE&RE investment.

Nevertheless, the MSP’s advancement has been slow up to now (as of October

2010 only 0.2 GW are effectively under implementation or 1%)40, as investing in

large RE electricity projects in this region remains complex and risky for investors.

Even if its full, MSP contribution would be marginal (5% of total capacity and even

less of electricity consumption, impelled by a rapid and hard-to control energy in-

crease)41. This is also much less than the large planned coal and gas power plant

projects (almost 20 GW after +64 GW for the period 2000-2005) that are expected

to reach 240 GW by 2020 (multiplied by 3.5 over 2005 to 2020), or two-thirds of

the total at this horizon.42 Also, the MSP targets mostly electricity despite the large

solar water heater and biomass (as biogas, agriculture waste) potential and does not

fully include Turkey, despite its large wind and solar potential.

The projected interconnections by Medgrid between SEMCs and between the

two shores of the Mediterranean should be designed and used to effectively ex-

change renewable electricity, not to import poorly-regulated fossil and nuclear

power generation (e.g. coal and gas power plants in Tunisia and Morocco planned

by some EU utilities to use future ‘green’ electric interconnections to export to Spain

and Italy), furthermore outside the EU emissions trading scheme (ETS). Apart from

destabilising partner energy systems, this will create unfair competition (even

dumping) for EU renewable and fossil electricity producers. Also, it appears crucial

38 See (http://setis.ec.europa.eu/newsroom-items-folder/european-commissions-launches-

med-tso-to-boost-mediterranean-electricity-systems-2). 39 “Heliosthana, a Mediterranean sustainable energy country”; WWF/HBF; May 2010; ‘Eu-

roMed Energy Cooperation & the Mediterranean Solar Plan: A unique opportunity for a

fresh start in a new era?” Bergasse E.; CIDOB, Barcelona, July 2011. 40 “Study on the Financing of Renewable Energy Investment in the Southern and Eastern

Mediterranean Region”, FEMIP/EIB; October 2010. 41In the context of weak or non-fully operational EE policies and institutions. 42 OME, 2008 and MEDPRO WP 4b indicate a lower increase of total capacity at 200 GW

by 2020 with a higher share of renewables (26%, of which 14% for hydropower and 12%

for other renewables (wind accounting for almost 8%).



to ensure a fair playing field between investors and between SEMCs, minimum co-

ordination between DESERTEC and Medgrid, and convergence within the MSP.

Thus, the forthcoming Master Plan of the MSP (to be adopted by early 2013),

within the EuroMed energy cooperation (and its current and future regional action

plan) would benefit from introducing various changes:

Revising its quantitative objectives by:

- Taking into account Turkey’s EE&RE potential (estimated at 23 GW,

only for wind);

- Incorporating heat (solar thermal) and biomass (biogas, agriculture

waste) into RE potential;

- Revise the ‘20 GW’ objective in terms of available renewable electric-

ity (in GWh) which can be delivered to the grid;

- Expressing the energy efficiency objective in negaWatts (in nGW) and

saved electricity (in nGWh);

- Setting post-2020 renewable energy and negaWatts targets.

Amending the solar plans with clear and detailed implementation timetable

backed by robust market reforms to progressively reach market fundamentals.

Giving a priority to EE (in particular standards and labels) the most effective

and cost-effective tool to control energy demand and satisfy needs with RE.

Adding an action plan for rehabilitation and modernisation of national grids

and interconnections (they are largely outdated and weak while RE requires

strong grid capacity and reactivity).

Better use of MPC expertise on EE&RE; propagate regional and national best

practices.

Reinforcing regional cooperation on energy statistics within MEDSTAT43

(the EuropeAid regional capacity building programme on statistics) espe-

cially on data collection, energy balances and indicators, according to Euro-

stat and IEA standards.

Promoting regional partnership on related R&D, academic activity and man-

ufacturing.

The forthcoming Master Plan of the MSP should be widely discussed with all

stakeholders and endorsed by the EU and MPCs to become a cornerstone of the

EuroMed energy cooperation within the EU energy external policy.44 On the imple-

mentation and institutional side, the MSP should clearly articulate responsibilities,

43 See (http://epp.eurostat.ec.europa.eu/portal/page/portal/medstat/introduction/). 44 See (http://eeas.europa.eu/energy/index_en.htm).



in particular, between the UfM Secretariat, EC (headquarters and EU Delegations),

ENPI projects, especially the Paving the Way for the MSP EuropeAid project, MPC

governments and regional centres such as the Regional Centre for Renewable En-

ergy and Energy Efficiency (RCREEE45), the regional focal reference for EE&RE

deployment as well as MEDENER, the Mediterranean network of EE&RE agencies

(www.medener.net). In addition, interactions with industry/investors (DESERTEC,

Medgrid) and civil society would help to enhance the regional ownership of the

initiative.

The need for integrated regional financing

Undoubtedly, the implementation of the envisaged investment projects within

the MSP, DESERTEC and Medgrid, once regulatory and market conditions are met,

will also heavily depend on the financing.

Up to now, the financing of RE investments in MPCs by private banks (EU

and PC) has remained limited (e.g. Tunisia’s solar water-heater PROSOL

programme. 46 International Financial Institutions (IFIs) provide most of the

financing. Since May 2011, the EBRD has extended its coverage to North

Africa with high ambitions (a potential annual investment of €2.5 bil-

lion)47.The World Bank with the Clean Technological Fund (CTF)is also en-

gaged in the region mostly in financing of RE. However, the EU remains the

largest contributor, through various channels48:

- The European Investment Bank (EIB): its loans, which target large pro-

jects (minimum of €20/25 million), are provided through a specific tool

of the Facility for Euro-Mediterranean Investment and Partnership

(FEMIP)49, credit lines to local banks and project investors (Special

FEMIP Envelope). Out of a total of almost €10 billion of FEMIP loans

45 The Regional Centre for Renewable Energy and Energy Efficiency (RCREEE) gathers

nine South Arab countries plus Libya and Yemen; (www.rcreee.org) and was established in

2008 in Cairo at the initiative of the Danish and German cooperation agencies, and then with

EC support. Staffed by a joint EU and MED expert team, RCREEE has developed a broad

and strategic set of activities on EE&RE policy deployment in coordination with ENPI South

energy projects (MED-EMIP, MEDENEC and PWMSP). 46 www.unep.org/climatechange/finance/LoanProgrammes/MEDREP/PROSOLinTuni-

sia/tabid/29559/Default.aspx. 47 As decided by the EBRD Annual Meeting in Kazakhstan on 20-21 May 2011:

(www.ebrd.com/pages/news/press/2011/110527.shtml. Current EBRD investments in Eas-

tern Europe and Central Asia stand at around €9billion per year). 48 Also the GEEREF (Global Energy Efficiency and Renewable Energy Fund) focuses on

equity investment in EE&RE projects but does not cover the Mediterranean region yet. 49 See (www.eib.org/projects/regions/med/index.htm?lang=en).

http://www.medener.net/

http://www.rcreee.org/



for the period 2002-2009, the energy sector accounted for 37%, of

which only €130million (1.3%) for renewable energy;

- InfraMed Infrastructure:50 the first financing facility of the Union for

the Mediterranean (UfM). The InfraMed Fund is dedicated to invest-

ments in infrastructure in the SEMCs with initial commitments of €385

million to be raised to €1 billion (energy is expected to be a priority

sector);

- EU member states’ bilateral financing: several national development

agencies such as the German Development Bank (KfW) and the French

Development Agency (AFD) provide grants and concessional loans to

specific projects (e.g. German and Spanish loans to wind farms in

Egypt);

- The Mediterranean Carbon Fund (MCF): CDC Climat, AFD, PRO-

PARCO, the European Investment Bank (EIB), CDP and KfW plan to

launch in 2011 the MCF, which will purchase carbon emission reduc-

tion credits with initial commitments of €200 million.

Overall, the EU’s existing financing scheme for EE&RE in the region is diverse

but it appears rather fragmented (e.g. between EIB’s FEMIP and EC’s NIF), not

sufficiently energy-specific, and mostly designed for large projects (e.g. EIB: only

over €20/25 million), thus excluding a vast potential of small and medium projects,

notably developed by SMEs.

The EU plans to increase the total envelope of EIB loans for the region to €6

billion between 2011 and 2013 (2010: €2.6 billion). This scale of effort provides a

real opportunity to establish a dedicated joint regional development bank (possibly

named “EuroMed Bank”, an EIB extension and following the EBRD model). It

would need close coordination with other financial regional and bilateral initiatives

such as the InfraMed Infrastructure. Also, a specific SEMCs’ bank would need to

design an integrated financing scheme, both for large and small sustainable projects

(e.g. EE&RE revolving funds) based on overall costs-benefits analysis.

50 Created in 2010 by Caisse des Dépôts (CDC-France), CassaDepositi e Prestiti (CDP-

Italy), the European Investment Bank (EIB), Caisse de Dépôt et de Gestion (CDG-Morocco)

and EFG Hermes (Egypt).



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(http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/ME-

NAEXT/0,,print:Y~isCURL:Y~content-

MDK:22307440~pagePK:146736~piPK:146830~theSitePK:256299,00.html).

World Resource Institute (2004), “Removing Subsidies Leveling the Playing

Field for Renewable Energy Technologies”, Washington, D.C.

WWF (2010), “Heliosthana, a Mediterranean sustainable energy country”, Brus-

sels (wwf.panda.org/heliosthana).

WWF (2011), “Mediterranean solar hotspot, Lebanon fact-sheet”, Brussels.

http://www.un.org/millenniumgoals/

http://www.africanexecutive.com/modules/magazine/articles.php?article=237



Annex 1. SEMCs Household Electricity Prices (2008)

Figure A1. Average electricity tariffs for households in 2008

Figure A2. Average monthly electricity household bill (in kWh/month)

(MEDENER/ADEME, 2012)

0

2

4

6

8

10

12

14

16

18

Eg

yp

t

Sy

ria

Lib

ya

Alg

eria

Jord

an

OP

T

Mo

rocc

o

Tu

nis

ia

Leb

ano

n

Isra

el

Tu

rkey

CSP EU 27

Residential

Wind

c€/kWh



Annex 2. Energy Subsidies in southern and eastern Mediterranean countries (SEMCs)

Table A1. Food and fuel subsidies in SEMCs as a% of current government expendi-

ture

Note. * Projection.

Source: “Food and Energy Prices, Government Subsidies and Fiscal Balances in South Med-

iterranean Countries”. ECOFIN paper (Ronald Albers and Marga Peeters; January 2011).

0,0 5,0 10,0 15,0 20,0 25,0 30,0 35,0

2002

2003

2004

2005

2006

2007

2008

2009

2010*

2002 2003 2004 2005 2006 2007 2008 2009 2010*

Tunisia 4,1 3,5 5,1 11,8 13,6 15,7 17,7 11,6 11,0

Syria 15,0 12,4 12,4 13,7 12,6 17,1 14,4 14,6

OPT 0,7 27,6

Morocco 4,9 7,2 8,8 10,7 12,4 19,9 7,8 8,9

Jordan 1,8 3,3 11,1 18,9 11,9 14,5 9,3 3,9 3,8

Israel 2,0 2,3 2,1 2,1 3,3 2,3 2,5 2,5 2,5

Egypt 4,6 4,8 6,7 8,1 27,4 25,2 30,9 27,2 26,2

Algeria 0,0 0,0 0,1 0,1 0,2 9,9 7,0 7,7



Table A2. IEA Estimates of Energy Subsidies in selected energy exporting Arab

Countries, 2010

Average rate

of subsidiza-

tion, %

Subsidy,

US$ per

person

Total sub-

sidy, % of

GDP

Subsidy by fuel, US$ bn Total sub-

sidy, US$

bn Oil Gas

Electric-

ity

Algeria 59.8 298.4 6.6 8.5 0.0 2.13 10.59

Libya 71.0 665.0 5.7 3.2 0.3 0.78 4.21

Egypt 55.6 250.1 9.3 14.1 2.4 3.81 20.28

Saudi

Arabia 75.8 1586.6 9.8 30.6 0.0 12.95 43.52

Iraq 56.7 357.3 13.8 8.9 0.3 2.16 11.31

Kuwait 85.5 2798.6 5.8 2.8 0.9 3.91 7.62

Qatar 75.3 2446.0 3.2 1.2 1.4 1.59 4.15

UAE 67.8 2489.6 6.0 2.7 10.0 5.51 18.15

Source: Fattouh B, 2012.